Many believe today that we are at a "Bretton Woods" moment.
If you've ever visited the beautiful resort of Bretton Woods, in New Hampshire, you might think this is some kind of tourist promotion.
However, the reference is to the 1944 meeting where more than 40 countries redesigned the international financial order in remarkably innovative ways in light of the financial chaos of the 1930s. As we witness the worst global financial meltdown since the Great Depression, there are expectations that policy-makers might respond with equally ambitious reforms.
The recent G20 leaders' summits have encouraged these expectations. Like the Bretton Woods architects, the leaders appear to share a broad desire to assert greater public regulation over international financial markets, and some have even explicitly voiced their hopes for a "Bretton Woods 2."
So far, however, their initiatives toward this goal have been more incremental than bold. While much has been done, there remains more to accomplish if they are to assume the mantle of Bretton Woods.
Many of the reforms endorsed by the G20 leaders have focused on strengthening existing international rules that promote transparency and better risk management within the global markets. The leaders have also encouraged regulators and supervisors to focus their attention on financial institutions (e.g. hedge funds), markets (e.g. credit derivatives), and practices (e.g. compensation strategies) that had previously been quite neglected.
Tax havens have also come under much greater scrutiny. At the London summit, the G20 leaders declared their readiness to take action against countries that have not met international standards for tax information exchange, a threat that prompted most tax havens to announce their intentions to commit to the standards. The G20 leaders are also now considering pressuring offshore financial centres to comply with international prudential and supervisory standards.
Alongside these efforts to plug holes in and strengthen existing international prudential rules, the G20 leaders have also signalled a philosophical shift in their approach to international regulation. In addition to microprudential regulation of individual entities, they will also now focus on macroprudential regulation that looks at the buildup of excessive system-wide risk.
The new philosophy is setting the stage for more ambitious international initiatives. Banks will soon be required to build up buffers of resources in boom times that are then available to be drawn upon when the economy worsens. Accountants are being asked to reconsider their standards in light of macroprudential concerns. Regulators are also considering constraining leverage beyond the banking system by enforcing margin and collateral practices in some securities markets.
In one sense, all these various G20 initiatives move beyond the original Bretton Woods regulatory agenda. Since the Bretton Woods architects did not anticipate the kind of highly integrated global financial markets we have today, they devoted little attention to this kind of international prudential regulation.
In another sense, however, contemporary reforms represent a less dramatic means by which to reassert public regulation over international financial markets. At Bretton Woods, negotiators reacted against laissez-faire approaches to international finance by endorsing national controls over cross-border financial movements. International financial regulation, in other words, was a synonym for curtailing the international mobility of money. The rationale also went beyond a prudential one to include the protection of the policy autonomy of national governments from international market pressures.
While the G20 leaders are pioneering new forms of international prudential regulation, they have devoted much less attention to initiatives to restrict cross-border capital mobility. Even if their goals remain primarily prudential, this neglect may not be justified.
The recent financial bubble experienced by the United States was, after all, exacerbated by large-scale capital inflows. And its experience was not dissimilar to many earlier crises in developing countries which were preceded by massive influxes of capital that generated bubbles in those economies.
Another reason to widen the regulatory agenda is that the efforts to create entirely shockproof global markets are likely to fail. The vulnerability of global markets to crises can be reduced by international prudential regulation, but it is unlikely to be eliminated, especially given the speed of financial innovation and the difficulties of co-ordinating national regulatory practices.
Given this, it would be prudent for G20 leaders to accompany the strengthening of international prudential regulation with a parallel track of permitting national governments to buffer themselves from excessive cross-border capital mobility when necessary. Developing countries, in particular, which are most prone to speculative cross-border movements, should be supported when they seek to restrict excessive foreign borrowing in good times and control capital flight during crises.
More generally, it is worth considering the benefits of discouraging international financial speculation through the imposition of a very small tax -- say 0.25 per cent -- on all foreign exchange transactions in the world's financial centres. This measure would have the added advantage of generating considerable revenue that could help fund global public goods as well as current fiscal deficits that have resulted from efforts to address the financial meltdown.
Since their inaugural summit, G20 leaders have made considerable progress in strengthening and reforming the regulation of international finance. If they embraced these bolder initiatives, they could make a better claim that this was indeed a Bretton Woods moment.
Eric Helleiner is the Centre for International Governance Innovation (CIGI) chair in international governance at the Balsillie School of International Affairs, and a professor in the University of Waterloo's political science department.