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The Next Bretton Woods

NEW YORK – The world is sinking into a major global slowdown, likely to be the worst in a quarter-century, perhaps since the Great Depression. This crisis was “made in America,” in more than one sense. 

America exported its toxic mortgages around the world, in the form of asset-backed securities. America exported its deregulatory free market philosophy, which even its high priest, Alan Greenspan, now admits was a mistake. America exported its culture of corporate irresponsibility – non-transparent stock options, which encourage the bad accounting that has played a role in this debacle, just as it did in the Enron and Worldcom scandals a few years ago. And, finally, America has exported its economic downturn. 

The Bush administration has finally come around to doing what every economist urged it to do: put more equity into the banks. But, as always, the devil is in the details, and United States Treasury Secretary Henry Paulson may have succeeded in subverting even this good idea; he seems to have figured out how to recapitalize the banks in such a way that it may not result in resumption of lending, which would bode poorly for the economy.

Most importantly, the terms that Paulson got for the capital provided to America’s banks were far worse than those obtained by British Prime Minister Gordon Brown (not to mention those that Warren Buffett got for putting far less into America’s soundest investment bank, Goldman Sachs). Share prices show that investors believe that they got a really good deal.