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The bare bones of a new policy regime

It should comprises two elements - a new international monetary system and a new banking system


As argued in the post “Regime Uncertainty Undermines Confidence”, only a new policy regime, not changes to individual policy areas (such as regulatory policy) will reduce the existential angst that is crippling business and over-shadowing the recovery.

New money…..

  • It should establish a global currency standard.
  • The standard should be sufficiently attractive that countries will voluntarily wish to submit to its disciplines for the sake of the benefits associated with membership: it would be more like the classical gold standard than the eurozone.
  • The global standard needs a hard anchor and convertibility into the goods or assets forming the anchor.
  • The way forward is likely to lead in the medium term to exchange rate targets and then fixed rates, leading in turn to the formation of a common currency area among the major currency zones, and to common rules over finance; and in the longer run to agreement on a hard monetary anchor.
  • Loss of monetary sovereignty is an inevitable concomitant of an economy’s full integration in the global economy and financial system.
  • Clear evidence of progress to a strong, rules-based, international system will restore confidence and lay the basis for sustained, long-term growth.
  • Is such a “New Bretton Woods” conceivable? Of course it is!

    …. and new financial sector
  • A new system of financial intermediation must accompany the new international monetary system.
  • It must reconnect the world of finance with the real world of jobs, investment and production.
  • It must reduce the political and financial muscle of the financial sector in general and mega-banking groups in particular
  • It should reduce the role of loan contracts as a form of intermediation between savers and investors/borrowers.
  • It should rest primarily on equity and equity-like contracts, where investors/depositors share in the upsides and risks of investment/loans. It should learn from both the successes and shortcomings of Islamic finance. Modern technology can be used to overcome the “asymmetrical information”  arguments usually made for banks issuing nominal fixed-value contracts and investing in risky assets. Moreover the social costs of such a system now outweigh its benefits.