Curitiba, Estado do Paranà, Brazil

Paolo Raimondi, economist, Rome, Italy

Mr. Governor,
I would like to thank you very much for your kind invitation to come to Curitiba to participate in this important international conference. I would like also to extend my greetings to all the organizers, colleagues and participants.

(Text of Raimondi's presentation to the conference)

The global financial crisis has turned into an economic recession which is quickly degenerating in a dangerous world depression, provoking more unemployment, poverty and underdevelopment with very serious political and social consequences. After failures of banks, we are faced with the collapse of entire industrial sectors, like the auto industry, with a credit crunch effecting small and middle size firms that are still the strongholds of the productive economy, with the reduction of families’ incomes, of consumption and of new investments, and of the international trade. More than a call for a true global reform, the alarm reported in the media seems a mere expedient to ask for governments bail out. Till today, the U.S. have injected liquidity and aids for about 1.500 billion dollars and Europe for over 1.800 billion euros (about 2.300 billion dollars) without bringing about any positive effect against the pandemics of the financial crisis.

 At this point, I would like to quote few paragraphs from the “Modena Declaration” prepared by a working group of Russian and Italian economists and politicians gathered in Modena on July 7-8 2008 for the seminar “The World Finance: New Initiatives”, which I organized, from Italy, together with Yury Gromiko from Russia. Many articles and books have been already written of the causes of the crisis; we wanted to indicate our analysis in a few lines. The entire text of the “Modena Declaration” will be in the conference papers.

 “The crisis which has been developing for the last 10-15 years, in fact, has happened as the result of a decision taken on 15 August 1971 – namely, to separate the US dollar as the currency for international trade from its fixed gold reserve equivalent. Until that moment, gold served as the definer for real value of the dollar as well as other currencies. But since that moment the rapid growth of fictitious capital has started, the system of floating rates of exchange has been established, the financial system, first of all the speculative one, has been separated from the real productive economics."

 “The financial and currency system has become more and more deregulated and has undermined all controllability and governance systems and thus led to a range of financial bubbles that were swallowing up the industrial, agricultural and trade sectors. “The most dangerous financial bubble that has come out of control is that one of the so called derivative financial instruments. According to estimates of the Bank for International Settlements in Basel, the nominal value of OTC (Over The Counter ) derivatives (out of official markets deals that are not accounted in official banks and other institutes balances) amounts to 600 trillion USA dollars with rate of annual exponential growth of 25%. “To understand the problem we just need to compare this bubble, which did not exist 20 years ago, with the world gross domestic product (GDP) that amounts now to 55 trillion USA dollars in current prices.”

 I would like to add that this crisis is not global because it effects the entire planet, but because it is the crisis of the so called financial globalization, without rules and based on a quick growing debt, above all internal and foreign American debt, with a high leverage and the rejection of any  risk assessment and with the complicity of the rating agencies.

 The Declaration contains a project for a global reform whose details I will speak later.

 Two weeks later everything broke and the wave of the financial crisis became unstoppable with bankruptcies of banks and insurance companies in the U.S. and in Europe. After the subprime crisis, failures in the derivative contracts provoked a liquidity crisis with a chain of sell out. From that moment on we had a series of banks bail outs through liquidity injections without any criteria and any priority. Together with Mr. Lettieri I proposed to intervene according to the rules of  bankruptcy procedures, where we could have saved and protected the sane parts of the banking system while we should have frozen and neutralized the toxic parts, beginning with the OTC derivatives.

 These items have been dealt also in a seminar “Global financial crisis: proposals for the G-20” I organized in a room of Palazzo San Macuto of the House of Representatives in Rome on November 13 together with economists and parliamentarians who in the past supported the idea of a “New Bretton Woods”.

 The G-20 Summit in Washington on November 15 was a lost occasion. It was clearly a predictable outcome because the same institutions and the same people that supported the formation of the speculative bubbles at the orders of the big finance, that till today oppose any serious global financial reorganization, could not become the promoters of a true and courageous reform. We can have many hopes in the new Barack Obama’s Administration, but we should also be aware that the U.S. alone, or with a shading away hegemonic pretension, that, could not face the crisis in a resolute and just fashion.

 An analysis of the G-20 final communiqué gives several very negative and worrisome indications. The only positive and historic novelty is the involvement of the so called emerging nations like Brazil, China, India, Mexico, even if more than giving them a stronger political role and a voice, these countries have been first asked to contribute money and participate in the bail out of the banking system.

1) Despite being responsible in the bankruptcy of nations like Argentina, the IMF was given more power to intervene and to define the orientations of the economic policies. Together with the Financial Stability Forum, chaired by the Italian central bank governor Mario Draghi, also a former executive of the Goldman Sachs investment bank, the IMF is indicated by many economists as the possible unique global regulator in a new World Financial Organization, that should be created as an  imitation of the WTO. Behind this project there is the idea of a supranational management and supervision of finance and economy, neutralizing the role of nation states and of their government and democratically elected Parliaments. A similar solution, promoted also by many “liberal” economists, would produce a dictatorship of speculation and finance over the entire economic system. If something like this would have been already in power today, we would have experienced already dictatorial and austerity policies to bail out the failing banks, without any opposition and any voice to represent the interests and the basic rights of the peoples, of the producers and consumers.

2) A set of rules, as academically demanded by all, should have been immediately defined to deal particularly with the OTC aggressive and toxic derivatives. It is a big mistake to try to save the sick ,and the cancer as well. One must agree on a system to immediately stop the speculative activities and to dry up the swamp of speculation. Instead the final communiqué speaks only “to strengthen transparency” and even “to improve the infrastructure of the OTC markets to make them capable of supporting growing volumes”!

3) The financial and banking crisis has landed on the shores of  the real economy, whose sectors are down spiraling as a crashing plane. We are not in a so called cyclical crisis, but in a systemic crisis. The, the wish of the Washington summit “to stimulate our economies … to stimulate the internal demand” is clearly not enough. What is needed it to propose in modern terms the binomial “public intervention” and “return to production”, and to define in a shared and coordinated fashion a program of big technological and scientific innovations, of great infrastructure, industrial and agriculture projects of continental dimensions, on which other regional and local smaller projects could be based, to produce more wealth with more intelligent, human and environment friendly instruments and to increase the labor productivity and the productivity of the entire economic system. We must put the interest of the nations and of the people before the interest of the market, supporting with concrete measures the salaries, the lower incomes of precarious workers, of pensioners and students, and also the activities of the small and middle size entrepreneurship.

 At this point I would like to introduce some aspects of the European and Italian policies which could stimulate some thoughts and our decisions and proposals.

* The present banking and economic crisis has put in discussion the limiting criteria of the Maastricht Treaty, like the barrier for the deficit of 3% to the national GDP. These criteria are the products of the same supranational attitude which is now proposed to manage the future financial system. French president Nicolas Sarkosy and German Chancellor Angela Merkel, but now also the European Commission, demand a 1-2 year suspension to allow a break of the limit of the public deficit. We must also stop to consider productive investments, like infrastructures, as costs and consider them out of the limiting criteria of the Treaty.

* This crisis is different from the ’29, because today we have a more serious one. In 1929 and in the following years there was a banking and liquidity crisis with a profound deflation, a collapse in international trade and mass unemployment. At that time America came out with the banking reform and the New Deal program of president FD Roosevelt, while Europe fell under the most violent and inhuman dictatorships of the history. Today, besides the old mechanisms of the crisis there is in addition speculative bubbles of unimaginable dimensions, a total globalization of the system and a complete deregulation.

* Also the “New Bretton Woods” must have different priorities of the 1944 Agreement because at that time there were a winner nation, the U.S., creditor with the rest of the world, the dollar as the dominating currency, and a predefined international political alliance, even if it excluded the majority of the peoples and of the nations of the world. On the contrary today this leading power is declining, indebted to the rest of the world, with an economy in crisis and a bankrupt financial system. The New Bretton Woods can only be based on a multi polar agreement in all the institutional fields, in the political, military but also in the economic and monetary fields. The new actors will have to coordinate their actions together, and with the U.S., to avoid false reactions and miscalculations that could provoke more serious international political crises. The New Bretton Woods could not refer itself too much to the previous 1944 agreement, but will have to take inspirations from the experiences of FD Roosevelt and JF Kennedy, from the “Planification Indicative” of Charles De Gaulle, from the idea of  the “Stato Imprenditore” of the Italian ENI founder Enrico Mattei and from the policies of independent and sovereign development of the Non Aligned Movement and of the emerging countries like Brazil and the Mercosul. In discussion it is not only the definition of the rules of the financial, monetary and economic system, but the design of new institutions for a new civilization model.

* In Italy, while for the internal policies there is not much agreement, I must underline the positive role played by the Italian economics minister Giulio Tremonti on the global crisis at the international level. Tremonti was one of the very few to denounce the danger of the financial dictatorship and deregulation, proposing a New Bretton Woods of rules and initiatives coherent with an economic upswing, as he indicated in his recent book “The Fear and The Hope”. He suggests the idea of a colbertist state with public support for development policies combined with important projects for credit formation, like bonds to finance infrastructures and for a direct capital participation (equity) through a network of state controlled national institutes, like the Italian Cassa Depositi e Prestiti, the French Caisse des Depots et Consignations and the German Kreditanstalt fuer Wiederaufbau (KfW), that with different techniques but with the same orientation promoted the economic reconstruction and development after WWII. Today also the European Investment Bank could participate in such a project.

 On the other side Tremonti must abandon the old and dangerous idea of protectionism based on tariff barriers that would lead to trade wars and to a generalized trade collapse. The Italian minister is anyway one of the very few government leaders to warn that the worse has still to come, as he did it in a recent interview with Corriere della Sera November 9:” It is like a videogame: a monster pops up and you destroy it; while you relax a bit a second, different one arrives. Then a third and bigger one, and a fourth one. The first monster was the subprime and in some way we could manage it. Now the second one, the credit cards, is arriving; in America they are better to be called debt cards. And also this one could be dealt. But the third monster is approaching, that of the corporate debts, also with the expiring corporate bonds. On from the dark one can begin to see the shadow of the super monster, the “derivatives”.”

 I would like to conclude presenting you some working proposals indicated in a very synthetic way already in the Modena Declaration. There are outlines for a working path to realize a “New Bretton Woods” reform.

1. The Reform of the international currency system, including the introduction of:

a. The System of fixed exchange rates, that could be changed only within the context of contracts signed between parties and connected with development of real economic sectors.
b. The Linkage to gold reserves or to a basket of main natural resources and/or a basket of specially chosen currencies.
c. Defining a new currency or a basket of currencies (not just the USA dollar) accepted in the system of international settlements.
d. Taking under control currency speculations.
e. Taking under control capital flows.
f. Creation of a “double approach” crediting system - with low long-term interest rates for industrial  investments and high penalty rates for purely financial operations.

 

 Thereupon one needs redefining of international organization functions such as the IMF and World Bank, which role was distorted as the result of latest crisis.

2. The Reform of the world finance system including the introduction of:

a. Regulation of existing derivative instruments.
b. Enforcement rules that will ban the speculative deals OTC, minimize the derivative bubble and define the rules and regulations for future operations.
c. Liability for bidding with the help of derivative instruments at the stock exchange.
d. Liability for setting up standards and introducing of authorization and supervision by a special authority.
e. Cancellation of off-shore centers.
f. A ban on hedge fund speculative operations and so called collateralized promissory stocks (issue of securities against other promissory stocks).
g. Increase of taxation of financial speculative operations as well as of profits from them.
h. Support of public and private banking and credit intermediaries, necessary for policy of real industry and other productive investments.

3. The Reform of international trade system, including:

a. The revision of WTO agreements, that have deregulated industry and trade sectors to the prejudice of effectiveness and productivity of the whole economic system.
b. Promotion and support of large infrastructure investment projects of continental scale in transport, energy, communication and R&D  sectors.
c. Establishment of financial institutions for crediting of above mentioned sectors through the issue of project bonds in accordance with the ideas of Jacques Delores plan (chairman of European committee (1985-1995)).
d. The reform of taxation system, that will promote investment and effective reinvestment of profits into industrial sectors.
e. Defining of customs rules and regulations, social coverage rules and guaranties for environmental protection within the world trade union.

 The next steps related to the crisis and its solution will be effected by the beginning of Barack Obama’s Administration January 20 2008, by the second G-20 Summit after March and by the G-20 international conference in July on the Island of Maddalena in Sardinia. To make to first Bretton Woods it required two years of preparations and three weeks long conference of heads of state and of government. We do not have so much time. We must be able to establish a new global financial, economic and political architecture before the crises will create other out of control situations and social explosions. This must be done by establishing direct contacts and working alliances among the committed nations, among governments, parliaments and other institutions of Brazil and of other Latin American countries, of Russia, China, Italy and other European countries, and of the U.S.. The state governments and the peoples, not the interests of international finance, must decide our future policies.

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Weitere Beiträge auf SOLON:

International Seminar Curitiba, Parana State, Brazil - Von Paolo Raimondi
http://www.solon-line.de/intl-seminar-in-curitiba-brazil.html

“CRISE: RUMOS E VERDADES” - Speech by Paolo Raimondi
http://www.solon-line.de/crise-rumos-e-verdades.html

The Crisis and the Multipolar World System - Speech by Michael Liebig
http://www.solon-line.de/crisis-and-multipolar-world-system.html

On. Mario Lettieri: Intervento al Convegno-Seminario sulla crisi dei mercati finanziari
http://www.solon-line.de/mario-lettieri-intervento.html

Dem Gemeinwohl der Völker verpflichtet - Von Elisabeth Hellenbroich
http://www.solon-line.de/curitiba-gemeinwohl-der-voelker.html