Trillions out the door, ECB chief urges 'discipline'


Trichet Urges Return to 'Discipline' of Bretton Woods

By John Fraher and Gabi Thesing
Bloomberg News
Tuesday, October 14, 2008

European Central Bank President Jean-Claude Trichet said policy makers reshaping the world's financial system should try to restore the "discipline" that governed markets in the decades after World War II.

"Perhaps what we need is to go back to the first Bretton Woods, to go back to discipline," Trichet said after giving a speech at the Economic Club of New York today. "It's absolutely clear that financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline."

Some European officials are pushing to tighten oversight of markets after the past year's credit squeeze culminated last week in the biggest stock sell-off since 1933. Prime Minister Gordon Brown yesterday suggested the most sweeping rethink of global financial architecture since U.S. and European officials met in Bretton Woods, New Hampshire, in 1944. The rules they drew up governed much of the world economy for the following 30 years.

Officials fixed exchange rates, established the International Monetary Fund and World Bank, and started the process of rebuilding Europe's economy following World War II by encouraging nations to coordinate economic policies. Brown said national regulators must coordinate their work and banks should be pushed to disclose more trading positions.

"If we don't have discipline, then we are putting into question the functioning of the market economies and the functioning of our financial markets," Trichet said today.

... Restore Order

Asked whether the escalation of the financial crisis exposed shortcomings in the global monetary system, Trichet said central bankers have "been up to their responsibilities in these exceptional circumstances."

Trichet and U.S. Federal Reserve Chairman Ben S. Bernanke are struggling to restore order to credit markets after the collapse of Lehman Brothers Holdings Inc. and $638 billion in writedowns make banks reluctant to lend. The ECB and the Fed last week cut interest rates in tandem and yesterday agreed to flood the financial system with dollars.

Trichet suggested that slowing growth in the euro region may curb inflation, paving the way for more rate cuts after the ECB last week reduced its benchmark by 50 basis points to 3.75 percent.

"There has been a materialization of the downside risks to growth and we have to take that into consideration in all respects, and particularly as regards the influence that it has on the upside risks for price stability," he said.

... Explosion

Trichet indicated that recent market turmoil was partly a consequence of the deregulation that occurred in the aftermath of Bretton Woods' demise. That was triggered in 1971, when inflation forced the U.S. to abandon the dollar's peg to gold, an anchor of the system, heralding the era of floating exchange rates.

"The explosion of the first Bretton Woods in a way could be interpreted as a rejection of discipline," said Trichet.

Brown, who has pushed for a decade to strengthen the hand of international authorities overseeing the financial system, said yesterday in London that "we must devise new rules for a world of global capital flows" just as the founders of Bretton Woods "devised rules for a world of limited capital flows."

"Creating stability by adapting frameworks that have worked historically can improve credibility and hence the effectiveness of policy stabilization measures," said Lena Komileva, an economist at Tullett Prebon Plc in London. "This idea may gain traction with policy makers."

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