The ghost of systemic economic collapse in 2008 and 2009 loomed over the recent INET conference at Bretton Woods like the dirt-crusted snow on the White Mountains.
The Institute for New Economic Thinking's second official meeting at the site of the famous 1944 international gathering at Bretton Woods addressed macroeconomic theories that might appear removed from the day-to-day reality experienced by those of us who work in the market's trenches on behalf of our clients.Though billionaire financier George Soros was the catalyst for INET, his influence was eclipsed by a cast of the best and brightest of what some might call the financial intellectual elite. One couldn't help but enthusiastically rub elbows and exchange pleasantries with a lineup that included at least five Nobel laureates, government officials such as former British Prime Minister Gordon Brown, and provocative economic historians like Niall Ferguson and John Cassidy.It was no accident that the conference was hosted at the site of the historical talks which created, near the end of World War II, the modern and global economic structure that has served the world - for better and worse - for almost seven decades. The purpose of the conference was to elevate a new paradigm to think about problems, issues and changes in the global economy that the attendees of the first Bretton Woods conference couldn't have even imagined.It was appropriate that, unlike the 1944 conference, this was not a meeting of governments, but a private academic gathering to discuss and hopefully deal with global and vexing macroeconomic issues that impact us all. Soros is, to be sure, a lightning rod of controversy and his name guaranteed a modest group of protesters, some of whom believed this was a gathering of Marxists and some of whom believed it was a cabal for fascists. That was not the case. INET at Bretton Woods was a gathering of serious people dealing with serious issues and striving for the greater public good.There was no uniformity of opinion or ideological orthodoxy during the discussions I witnessed. The participants did, however, share a common certainty and responsibility that what happened in 2008-09, or earlier with the Asian crisis of 1998, were not economic aberrations but almost expected contagion outbreaks stemming from the complex global financial system that has emerged in the past three decades.‘What the banks did to us’While we might like to think that the free market can sort out inefficiencies, the reality is that the financial system has become a dominant force in global capitalism. Ideally, finance is the necessary lubricant of thriving capitalism. The shock of 2008-09 showed a different face - it has become its own engine of prosperity with incentives geared toward private gain with risk being subsidized by taxpayers and governments.Many who spoke at INET failed to predict, but clearly understood, how the collapse in 2008-09 could happen. The problem wasn't foresight. During one interview, former Fed Chairman Paul Volcker talked about the current environment and how difficult it will be to create meaningful reform, given the current state of political polarization."Who would ever sit down and think of designing a system that permitted China to get $3 trillion worth of reserves, and for the U.S. to happily use all that money to run up housing prices?" Volcker said. He said that, despite the obvious connection between the "great financial crisis" and the global financial system, few outside the conference had any political or institutional desire to actually reform it.Consider also Simon Johnson, former chief economist at the International Monetary Fund, who shared that the reality since 2008 is that, if anything, the large investment banks have become even "bigger" than they were when they were "too big to fail," and the public cost was 8 million jobs lost and increased private holdings of growing government debt."This is what the banks did to us," Simon said. "They got bailed out. And we have done nothing significant that will prevent this from happening again."It was, to be candid, a blur and a marathon of meetings and meals with sleep between midnight and 6 a.m. seemingly an option. Though the academic discussions were formidable, there was a general consensus that the economic profession needed less mathematics and more of a complete grounding in history, psychology, archeology and philosophy. To view economics in the context of an evolutionary and biological model may provide a better metaphor than math and physics.Though our clients may have weathered the recent storms particularly well, I came away from the gathering thinking less about economic theories than of philosophy and psychology. Our failings are all too human and all too predictable in hindsight. The gathering at Bretton Woods underscored the need to regain our social and political will and carve out a sensible and enforceable framework to protect the strengths and virtues of capitalism in a global economy. Otherwise, we are doomed to repeat the same mistakes with potentially greater consequences.It's incumbent on our political leaders to stop pugnacious debate over meaningless minutia. New Hampshire should be honored by its role in moving the economic discourse to a new and important level.Tom Sedoric, managing director-investments of The Sedoric Group of Wells Fargo Advisors, Portsmouth, can be reached at 603-430-8000. For details and video feeds of the gathering:ineteconomics.org.
This article appears in the May 6 2011 issue of New Hampshire Business Review