Has globalisation outstripped governance structures?

In November 2006, almost a year before the financial crisis that struck in 2007 and the recession that followed in its wake, Bloomberg Business Weekly put forward an idea that sounded radical at the time: A Big Big Idea – probably  too big to even consider right now – would be the creation of global institutions for governing the world economy. History tells us that market economies are prone to financial crises, to which the only solution is a strong central bank. During the Asian financial crisis of the 1990s, for example, the Fed played that role.” The idea is increasingly appearing less radical as the world seems to be heading for a completely restructured economic dispensation, along that which is likely to be a messy path.

Since then, the debt crisis in the European Union, fears that the Chinese economic miracle is but an illusion and a bubble on its way to a bust, market jitters of a disorderly crackdown on banks and financial markets, the inability of governments to come to grips with the problem of unemployment, and even the BP oil disaster in the Gulf of Mexico have dealt body blows to the hopes that the world economy can, driven by market forces, outgrow its woes.

It has also seen a fast dwindling blind faith in The Market to rectify matters.

In May this year, we could see how uncoordinated actions by national governments could spook the markets when American, European and Asian shares all tumbled in the wake of Germany’s partial ban on naked short selling and ahead of a crucial vote on the United States financial regulation bill.

Egon von Greyerz, from the Swiss asset management Matterhorn, recently wrote in a newsletter: “Yes, this is it! We have crossed the Rubicon and events in the world economy are now likely to unfold in a totally uncontrollable fashion. Clueless governments still don’t understand that it is their ruinous actions that have created a credit-infested and bankrupt world.

"They will continue to prescribe the same remedy that caused the problem in the first place, namely more credit and more printed money.

"The consequences are clear: we will have hyperinflation, economic and human misery as well as social unrest,” he wrote.

He added that “the latest EU [European Union] and IMF [International Monetary Fund] package of $1 TRILLION (750 billion euros) is yet another futile attempt by governments to abolish poverty by printing paper.

"Let’s be absolutely clear: this money does not exist and the EU governments are hoping by declaring such a large amount, they can con the Wolfpack speculators (expression coined by the Swedish Finance minister, Anders Borg).

"At this point, the EU has just picked a large round figure out of the air. But when their bluff is called by the Wolfpack and the next attack happens, EU governments will - after initial huffing and puffing - start printing unlimited amounts of paper," wrote Von Greyerz.

“Already back in 2007, we warned about the very high risk of the CDS [credit default swap] market. This is now one of the primary instruments used by the Wolfpack (expression coined by the Swedish Finance Minister Borg).

"The Wolfpack, speculators with enormous firepower such as hedge funds and investment banks, use the CDS market to attack any weak financial sector, be it a country, a bank or a company. The combination of the leverage of the CDSs and the massive capital available to the Wolfpack makes it possible for them to bring down or badly maul whatever they attack," he added.

"It was not the Wolfpack that caused the problem in, for example, Greece - but they can bring down a weak victim quickly and profit immensely and immorally from it.”

On the final day of the United Nations Conference on the world financial and economic crisis, Brazil's Minister of External Relations Celso Amorim also called for greater global co-ordination of economic and financial activities. It was the belief in self-regulation of markets which was one of the main causes of the current crisis.

The oil disaster in the Gulf of Mexico has  placed another factor with massive economic implications firmly back on the agenda: The fossil fuels dependence of the world - and the US as its biggest economy - has become untenable. Indeed, even before this disaster, US President Barack Obama had made his country’s dependency on oil a key issue before American voters. If anything, the Gulf of Mexico oil spill has instilled that promise with new urgency and momentum.

Moving ahead on this commitment, however, will not be easy. For most Americans, the priority is to break that country’s dependence on foreign – particularly Middle Eastern – oil.

But the US is more dependent for oil on Canada than Saudi Arabia, with only four out of its top 15 oil providers from the Arab world. This requires drilling in American waters as much as possible.

President Obama’s promise to end oil dependency has another dimension. Conscious of the environmental cost of burning fossil fuels and the danger of falling behind in the race to develop green technologies, he has made alternative and renewable energies a central component of his economic strategy.

Last week, Leadership Intelligence Bulletin reported on how the oil spill impacts US/UK relations. Since then, it has become increasingly clear that the impact is even wider, with some prominent sovereign investment funds among BP’s largest shareholders. BP has now been pressurised to suspend its quarterly dividend and set up an independent rescue fund of initially $20 billion that could escalate to $40 billion; its shares have plummeted to its lowest level since 1992 and it has lost its position on the BBC Global 30 index of the 30 largest companies in the world.

If what is good for the goose should be good for the gander, President Obama’s tactics against BP should also have wider implications. Endemic oil spills in Nigeria’s Niger Delta have robbed traditional fishermen of their livelihood.

Nigeria, a regular supplier of oil to the US, sees oil spills quite regularly. Recent damage to an Exxon pipeline was estimated to be leaking 100 000 barrels of oil per day for a week, though Exxon would not provide additional details of the damage (or cleanup or repair work).

Early this month, Royal Dutch Shell announced that it spilt almost 14 000 tonnes of crude oil into the Niger, Reuters reports.

The November 2006 Bloomberg report, referring to the American economy, stated: "No matter which party you belong to, or which Big Idea or school of economic policy you subscribe to, one thing is clear: Globalisation has overwhelmed Washington's ability to control the economy.

"Whether you're a Republican supply-side tax-cutter, a Wall Street deficit hawk of either party, or a Silicon Valley techie type, your preferred levers of economic policy just don't work as well as they once did."

In what seems to be increasingly true – not only for the US but for the globe as a whole – the report stated: “what's needed is a new Big Idea for economic policy – or two or three competing Big Ideas – that accounts for the verities of the global economy.”

The Matterhorn view of what lies ahead is: “the adjustment period will be very long and will involve economic and human misery, leading to social unrest and major political change. It will be a horrible experience for the world during this extended period of adjustment. But it will be like a forest fire that clears out the deadwood and creates the conditions for strong new growth.

“Once the new era starts, it will therefore be from a very much lower level, and individuals will be rewarded for hard work with little or no social security safety net. Credit will only be granted for sound capital investment projects, not for consumption or speculation. Ethical and moral values will return and the golden calf will not be worshipped.

"But before that, the period of readjustment will be very long and extremely difficult for the whole world,” it says.