Wednesday, October 15, 2008

Brown Seeks Global `Early Warning' System on Crises

(Bloomberg) U.K. Prime Minister Gordon Brown called for an overhaul of global financial regulation and an ``early warning'' system to prevent banking crises, setting up a trans-Atlantic clash over world economic management.

Brown, author of a British bank-bailout plan that was copied across Europe and in the U.S., urged a strengthening of the International Monetary Fund and better monitoring of global companies and banks.

``We now have global financial markets, but what we do not have is anything other than national and regional regulation and supervision,'' Brown told a Brussels press conference today before a two-day European Union summit.

Brown's call, echoed by other EU leaders in the wake of the biggest stock-market selloff since 1933, is likely to face headwinds from the U.S., which has enjoyed a dominant role in international financial institutions since the current rules were set at the end of World War II.

``The U.S. got what it wanted in 1944 and, I suspect, will do so again simply because the Europeans won't be able to decide what they want,'' said Martin Weale, director of the National Institute of Economic and Social Research in London.

At Bretton Woods, New Hampshire, in 1944, nations agreed to fix exchange rates, establish the IMF and start the process of Europe's postwar reconstruction by encouraging coordinated economic policies.

Top 30 Banks

Brown said national regulators must coordinate their work and banks should be pushed to disclose more trading positions. He called for an end-of-year deadline to place each of the world's top 30 banks under the supervision of a panel of regulators from the countries where it is active

While stressing a global approach, European governments are split over how to go about it, with leading countries -- including Brown's Britain -- traditionally opposed to handing over business regulation to outside authorities.

European leaders are pressing for a jumbo summit of the Group of Eight industrial nations plus developing countries including China and India to rework global financial rules and management of the IMF. Brown said that summit could take place in November or December.

``Now we have to create the institutions that are relevant not for national and sheltered economies, but are relevant for the global economy,'' Brown said.

To jumpstart that process, French President Nicolas Sarkozy, holder of the EU's six-month presidency, will travel with European Commission President Jose Barroso to the U.S. on Oct. 18 to meet President George W. Bush.

`Impression of Disorder'

EU governments initially reacted to the crisis in a ``piecemeal and ad hoc'' fashion, ``creating an impression of disorder and sending confused signals to financial markets,'' aides to Barroso said in a paper prepared last week and released yesterday.

In the meantime, European leaders have committed as much as $2 trillion to guarantee interbank lending and buy stakes in banks, to prevent hobbled credit markets from tipping the broader economy into recession.

The U.S. followed suit yesterday, announcing an unprecedented $250 billion government investment in banks, starting with nine institutions deemed critical to the survival of the system.

European Central Bank President Jean-Claude Trichet said a reshaped world financial system should try to restore the ``discipline'' that governed markets in the decades after World War II.

`Back to Discipline'

``Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline,'' Trichet said after giving a speech at the Economic Club of New York yesterday. ``It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline.''

Trichet indicated that recent market turmoil was partly a consequence of the deregulation that occurred after Bretton Woods' demise. That was triggered in 1971, when inflation forced the U.S. to abandon the dollar's peg to gold, an anchor of the system, heralding the era of floating exchange rates.

``The explosion of the first Bretton Woods in a way could be interpreted as a rejection of discipline,'' said Trichet.

German Chancellor Angela Merkel told parliament in Berlin today that her government wanted ``a strengthened role for the IMF for keeping tabs'' on global financial institutions.

Creating Stability

Trichet and U.S. Federal Reserve Chairman Ben S. Bernanke are struggling to restore order to credit markets after the collapse of Lehman Brothers Holdings Inc. and $640 billion in writedowns make banks reluctant to lend. The ECB and the Fed last week cut interest rates in tandem and this week agreed to flood the financial system with dollars.

``Creating stability by adapting frameworks that have worked historically can improve credibility and hence the effectiveness of policy stabilization measures,'' said Lena Komileva, an economist at Tullett Prebon Plc in London. ``This idea may gain traction with policy makers.''

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