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Financial Institutions

asked Her Majesty’s Government what is their assessment of the effectiveness of international financial institutions such as the International Monetary Fund and the World Bank. The noble Lord said: At the conclusion of the Bretton Woods conference in 1944, to universal applause, John Maynard Keynes paid tribute to his colleagues, who he said had performed a task appropriate, "““to the prophet and the soothsayer””." I often speak of the wealth of talent and experience that exists in your Lordships’ House; however, I do not think that any of us today, in the limited time offered to us, will be claiming the title of ““prophet”” or ““soothsayer””. What we can do, however, is look at the financial crisis that is upon us and ask what has happened, why it has happened and what must be done so that it does not happen again. As many of your Lordships know, I have had this debate in the ballot for a number of months. Not only am I delighted that it is taking place at such an important and appropriate time, but I am grateful to those Peers speaking in the debate today, many of whom are recognised as world experts in this field. I welcome the Minister to this House. I congratulate him on his appointment, and we look forward to his response at the end of the debate. If recent events have taught us anything, it is that the global institutions set up after the Second World War, such as the UN, the IMF and the World Bank, so appropriately created for that time, are now so out of step with our time. As reported in the Times, there are three kinds of organisations: those that make things happen, those that watch things happen and those that wonder what happened. Take the IMF, an organisation of over 2,700 employees, with access to resources in excess of $363 billion. With all those resources, where was the IMF last year when this crisis started to unfold? Where were the IMF’s warnings as the world sleepwalked into financial meltdown? And today, when we are in the grip of the crisis, where are the IMF’s proposals on how to end it? The question we have to ask ourselves is: if the IMF is not mandated to fulfil that important function, why not? To its credit, the IMF’s 2007 Global Financial Stability Report in fact recognised that the US housing market was slowing down. However, it said that, "““this weakness has been contained to certain portions of the subprime market ... and is not likely to pose a serious systemic threat””." Ironically, the stress tests that formed the IMF's evidence base for this report were produced by none other than Lehmann Brothers. A core function of the IMF is to act as the lender of last resort, but even there we have seen that it is not the lender of first choice. Take the Asian crisis of 1997, when South Korea ignored the advice of the IMF and came out the better for it. Today Iceland and Pakistan, for example, have both turned elsewhere first before approaching the IMF. I want to make it clear that this is not a blame game. It is about finding a new mechanism that will enable the global community to work together. I heard President Clinton say that, whereas countries have historically always been interdependent on one another, today countries are integrated with one another. We have all heard the saying that when America sneezes, the world catches a cold; we can now see that we all catch that cold the very same day. Today we see the Indian stock market anticipating the actions of the US Secretary of State for the Treasury before they have been announced. Today we see India, a country still without a fully convertible currency, having to react swiftly to the challenges and opportunities presented by our integrated global economy. The balance of economic power in the world is changing dramatically. The US, the European Union and Japan together contribute approximately 60 per cent of global GDP, and yet emerging countries with large surpluses are today investing huge sums of money in developed countries. These rising stars of the world economy need to be better integrated and represented in our global financial institutions. In short, the world’s top table needs to change—it needs more seats. The world is returning to where it was some three centuries ago, with India and China once again set to emerge as the two dominant economic superpowers. Yet neither country has a place in the G7 or the G8, and India remains excluded to this day as a permanent member of the UN Security Council. The chairmanship of the World Bank remains the gift of the President of the United States. For what reason? That America was once the bank’s biggest funder by far. Today, however, it is just one of many. If the World Bank is to be for the world, surely its governance should reflect today’s economic reality, not yesterday’s. Similarly, does the managing director of the IMF need always to be European? Why not an American? Why not an Indian? Why not the best candidate for the job? There is no question that America is by far the most powerful country in the world today, but, looking ahead just 20 years from now, when China and India are economic superpowers alongside the EU and America, will it, for example, seem appropriate for the headquarters of the IMF, the World Bank and the UN to all be located in one country? Contrary to recent events, we should be proactive, not reactive, and look at what is right for the world as it is today and as it will be tomorrow, whether that be a reformed World Bank—by the world, of the world, for the world—or a reformed IMF that would be genuinely global in its funding and in its scope, acting as an economic firefighter but, more importantly, as the steward and guardian of the global financial system. We need a mechanism for global financial institutions that can promote free trade without hampering free trade. We need regulation that is neither light-touch nor heavy-handed but balanced to protect consumers globally; to promote transparency; to prevent; to predict; to lead by example; and to argue forcefully that trade is not a zero-sum game. The Brookings Institution said earlier this month: "““Public institutions need to be the vehicles by which leaders take public responsibility for the public interest … The International Monetary Fund is in the doldrums, waiting for a new global ""mandate in the midst of a serious global financial crisis. Member governments have failed to act to give the IMF a role in co-ordinating national responses and institutional innovations to help remedy this financial crisis or prevent the next one””." Today it is Britain that has shown leadership in the international community through the announcement of its £500 billion rescue package for its financial sector, a sum that dwarfs America’s $700 billion package even at today’s exchange rates, and America’s economy is more than six times larger than Britain’s. In advance of the meeting of world leaders on 15 November, I urge the British Government to follow in the tradition of Keynes at Bretton Woods and to lead the way with boldness, confidence and authority in reforming our global financial institutions. Over 60 years ago those institutions were born out of the Second World War. Now they need to be reborn out of the global financial crisis as institutions that are fit for purpose for today and for tomorrow.