G20 Summit Missed the Real Target
Henry C.K. Liu

This article appeared in AToL on April 14, 2009


Leaders of Group of 20 attending the second Summit on Financial Markets and the World Economy in London on April 2, 2009, echoing the first in Washington DC in November 2008, continued the tradition of superficial posturing for political theater on global television, while missing the real target which is the need not so much as to revive dysfunctional trade that has collapsed from its own internal contradictions, but to redefine the predatory terms of international trade created by dollar hegemony.
British Prime Minister Gordon Brown, host of the G20 London summit, declared it as having created a "new world order". While unipolarity appears to be in the process of being replaced by emerging multipolarity, the world is still a long way from developing a new order. If anything, the G20 London summit was a desperate last-gasp attempt by the G7 to restore a failed old world order.
Need for Restructuring Dysfunctional Terms of Trade
To save the world from a prolonged depression, international trade needs to be restructured from its current destructive role of preempting domestic development towards a new constructive role of augmenting it. That the now nearly two-year-old crisis in financial markets has been created  by excessive debt denominated in a fiat dollar whose issuer has for decades failed to live by prudent rules of fiscal and monetary discipline has been acknowledged by the new president of the United States only in passing during the summit, while the solution to a debt-infested financial crisis is mistakenly deemed to be simply shifting massive private sector debt into public sector debt by spending future taxpayer money to save zombie financial institutions from bankruptcy. This approach of saving the decrepit institutions of free market capitalism rather than saving the severely injured global economy will only exacerbate and prolong the current financial crisis into a decade-long global economic depression.
For all economies except that of the US whose fiat currency has the unfair and unearned advantage of being the dominant reserve currency for international trade, excessive national debt denominated in foreign fiat currency, either private or public, threatens the economic and political sovereignty of independent nations. When international trade is denominated in fiat dollars, the US essentially imposes a global tax on all trade around the world, whether or not the US is a direct participant in the transaction and whether or not the transaction takes place within US jurisdiction. Foreign investment denominated in dollars, direct or indirect, naturally goes only to projects than can earn dollars, and not to where the target nation needs most for domestic development. Foreign investment then serves mainly the foreign investor, and only peripherally the target nation. This is why both foreign trade and foreign investment at levels beyond augmenting domestic development are undesirable and why nations should seek alternative methods of economic development.
Breaking Free from Dollar Hegemony
Dollar hegemony prevents all non-dollar economies from financing domestic development with sovereign credit denominated in their own currencies and forces them to rely on foreign capital denominated in dollars. Moreover, the exporting economies are in essence shipping real wealth created by low wages and environmental abuse to importing nations that have unearned sources for dollars. The dollar-denominated trade surplus earned by the exporting nations cannot be spent in the domestic economy without first converting them to local currencies. But such conversion will create inflation since the wealth behind the new local currency has already been shipped to the importing nations.
Thus the exporting nations, while starved for capital, have to invest the dollars they earn from low wages and environmental abuse back into the dollar economy, enabling the importing economies to have more dollars to import more.  Capital from the dollar economy is in reality debt from the exporting economies. Yet such debt will return to the lending economies as foreign capital to invest in the export sector in a vicious circle. Dollar hegemony is in essence the venue for a free transfer of wealth from the poor economies to the rich economies. This free transfer of wealth hurts workers in both the poor and rich economies by keeping wages low through cross border wage arbitrage. Low wages then create overcapacity unsupported by adequate demand in every economy.
When buyers and sellers are located within the same country, with settlements denominated in domestic currency, even with imbalance of payments, free trade is not predatory. But when buyers are located in different countries from sellers and trade is denominated in the buyer's fiat currency due to currency hegemony, trade is predatory in favor of the buyer even if the balance of payments is in favor of the seller. Essentially this is the situation with US-China trade.
The False Promise of Market Fundamentalism
Market fundamentalism is the belief that the optimum common interest is only achievable through a free market equilibrium created by the effect of countless individual decisions of all market participants each freely seeking to maximize his/her own private gain and that such market equilibrium should not be distorted by any collective measures in the name of the common good. It is summed up by Margaret Thatcher's infamous declaration that there is no such thing as society.
The fact is that in a world of sovereign states, all economies are command economies. The United States, the Mecca of market fundamentalism, commands its alleged market economy in the name of national security. While the US tirelessly advocates free trade, foreign trade is a declared instrument of US foreign policy. President George W Bush declares that "open trade is a moral imperative" to spread democracy around the world. The White House Council of Economic Advisers is organizationally subservient to the National Security Council. National-security concerns dictate trade policies the US adopts for its economic relations with different foreign countries.
World trade today is free only to the extent of being free to support US unilateralism. For the US imperium, the line between foreign policy and domestic policy is disappearing to make room for global policy. The sole superpower views the world as its oyster, and global trade is to replace foreign trade in a global economy the rules for which are set by a World Trade Organization dominated by the sole superpower.
Market fundamentalism as the term is generally used in macroeconomics is a key component of neoliberal globalization of trade, in the same sense that the British, through Adam Smith, promoted "free trade" in the 18th-19th centuries.  The difference between Smithian free trade and today's neoliberal market fundamentalism is that British free trade was limited to the sphere of political influence within the British Empire, whereas neoliberal market fundamentalism aims to be truly global.  The Washington Consensus is a conditionality for inclusion into global market fundamentalism through intervention on national sovereignty over monetary and fiscal policies. 
Eisuke Sakakibara, Japan's former vice-minister for international finance, widely known as Mr. Yen, in a speech titled "The End of Market Fundamentalism" before the Foreign Correspondent's Club in Tokyo on January 22, 1999, presented a coherent and wide-ranging critique of global macro-orthodoxy. His view, that each national economic system must conform to agreed international trade rules and regulations but need not assimilate the domestic rules and regulations of another country, is heresy to US-led, one-size-fits-all globalization. This view was prescient in view of the globalized market conditions that had led to the current financial crisis and is at variance with that put forth in the 2009 London G20 summit.  
Market fundamentalism helps no economy. It helps only selected segments in economies that subscribe to it.  Since the segment most helped by market economy is in political control of the US polity, market fundamentalism is billed as being the appropriate doctrine for the US and hence the world as well. Dollar hegemony is also detrimental to the US economy, as it is only good for the global dollar economy of which the US economy is but one component, albeit a key major one. Through globalization and the growth of euro-dollars (the name given to all offshore dollars everywhere and has no direct relation to the euro or the EU), the dollar economy is increasingly detached from the US economy. What is good for the dollar economy is not necessarily good for the US economy. Economic nationalists in the US are beginning to understand the threat of dollar hegemony to the US economy itself.
G20 Summit Sidetracked by Band-Aid Cures
While publicly avoiding the divisive issue of whether to push for more government fiscal stimulus to their politically separate but financially interdependent economies, the G20 leaders reached general consensus on regulatory reform to rein in systemic and institutional excesses in risk-infested financial acrobatics that had led to the worst crisis in financial markets in a century. The summit pledged $1.1 trillion in emergency aid to soften the adverse economic consequences without addressing the real target of needed reform, which is to correct the predatory terms of trade based on currency hegemony. While $1 trillion is no small sum, it amounted to a band-aid cure to a massive hemorrhage.
Washington Consensus Dead but not Buried
The London Consensus appears to have abandoned the Washington Consensus, a term coined in 1990 by John Williamson of the Institute for International Economics to summarize the synchronized ideology of Washington-based establishment neoliberal economists, reverberated around the world for a quarter of a century as the true gospel of reform indispensable for achieving growth in a globalized market economy. Economic neoliberalism has turned most trade-dependent nations into failed states. (Please see my AToL article: World Order, Failed States and Terrorism - PART 1: The failed-state cancer)

Initially applied to Latin America and eventually to all developing economies, the term has come to be synonymous with globalized neo-liberalism or market fundamentalism to describe universal policy prescriptions based on free-market principles and monetary discipline within narrow ideological limits. It promotes macroeconomic control, trade openness, pro-market microeconomic measures, privatization and deregulation in support of a dogmatic ideological faith in the market's ability to solve all socio-economic problems more efficiently, and to assert a blanket denial of an obvious contradiction between market efficiency and poverty eradication.

Financial capital growth is to be achieved at the expense of human capital growth. Sound money, undiluted by inflation, imposed on all by the US who ironically is the most flagrant violator of the sound money principle, is to be maintained by keeping wages low through structural unemployment and cross-border wage arbitrage. Pockets of poverty in the periphery are the necessary price for prosperous centers in the global economy. Such dogmas grant unemployment and poverty, conditions of economic disaster, undeserved conceptual respectability. Structural unemployment then becomes the vaccine against massive unemployment. Pockets of poverty become the venue to contain the spread of poverty. State intervention has come to focus mainly on reducing the market power of labor in favor of capital in a blatantly predatory market mechanism.
The set of policy reforms prescribed by the Washington Consensus is composed of 10 propositions: 1) fiscal discipline; 2) redirection of public-expenditure priorities toward fields offering high economic returns; 3) tax reform to lower marginal rates and broaden the tax base; 4) interest-rate liberalization; 5) competitive exchange rates; 6) trade liberalization; 7) liberalization of foreign direct investment (FDI) inflows; 8) privatization; 9) deregulation and 10) secure private-property rights. These propositions landed the world economy in recurring crises every decade, each bigger than the previous one, until the current crisis which is now described as the crisis of a century.
Of these ten propositions of the Washington Consensus, the G20 policymakers selectively called only for re-regulation and reform on uniform global standards on accounting, credit-rating and risk-management for banks, non-bank financial firms and hedge funds to prevent runaway systemic risk generated by aggregate externalization of unit risk. They left the more fundamental problematic propositions such as privatization, trade liberalization and FDI liberalization untouched.
IMF Strengthened rather than Reformed
G20 leaders tripled the financial resources of the International Monetary Fund (IMF) and offered less punitive cash loans to revive stalled trade to help affected governments, particularly those of poor countries, weather the effects of national insolvency such as surging unemployment and drastic cuts in social safety net budgets. All these measures of reform around the edges of the problem no doubt are needed, but their impact will be meaningless without a fundamental restructuring of the international financial architecture built on currency hegemony.
China Calls for New International Financial Architecture
Zhou Xiaochuan, governor of the People's Bank of China, the central bank, raised the pertinent question:
The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question, i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF?
The discussion on China's proposal to create a new international currency based on IMF special drawing rights to replace the dollar was not on the summit agenda.  But "discussions on this subject in a bilateral format" took place between China and Russia.

IMF Special Drawing Rights

Instead of dealing with the pertinent question, the G20 summit merely increased the resources of the IMF by $500 billion, plus new Special Drawing Rights allocation to be shared among its 185 members, 60% of which going to industrialized countries that do not need it, and $100 billion in increased lending by multilateral development banks. In addition, there was a $250 billion increase in trade credits to finance cross-border trade that has declined roughly 10% as a result of the credit crisis and the economic downturn. An additional $6 billion to boost lending to the poorest countries makes the total of $1.1 trillion to deal with the financial crisis.
The United States, still the world largest economy by far, has said it will contribute $100 billion, pending Congressional approval. Japan and the European Union each pledged $100 billion. China is expected to contribute $40 billion, an excessive allocation if per capita GDP, rather than total GDP or foreign reserves, is used as a basis for allocation.
The official statement issued at the end of the G20 summit reads like an attempt to write new regulatory rules on free market fundamentalism to save capitalism from self destruction in a financially integrated world economy that has outgrown the ability of sovereign nations to keep it from structural implosion.
EU Demand for Global Regulation Rejected by US
But a European demand for sweeping global regulation of financial markets was rejected by the US. While G20 leaders agreed to create a new Financial Stability Board to monitor the global financial system for signs of risks, they stopped well short of giving regulators cross-border authority as proposed by France. Instead, G20 leaders agreed only to more closely coordinate their regulation of "systemically important" financial institutions, but failed to endorse a proposed mechanism to resolve cross-border disputes that can be expected to arise in the continuing winding down of liabilities of insolvent banks. Instead of addressing the problem of toxic asset held by banks, G20 leaders settled on an esoteric change in US accounting regulations that allows banks to defer write-downs in the value of their most troubled toxic assets to mask insolvency. "Regulation is still sovereign," declared US Treasury Secretary Tim Geithner.
Comparing 2009 to 1933
Comparison is made to the June 1933 London Monetary and Economic Conference.  Delegates from 66 countries then gathered in London to try to agree on plans to revive the world economy in the midst of the Great Depression. Organized by the League of Nations, the G66 conference aimed at reviving stalled global trade and at stabilizing commodity prices by restoring the gold standard.  The 1933 G66 conference took place in the grand Geological Museum in London, a testament to the solid value of gold, in contrast to the warehouse-style conference centre at Docklands as the venue for the 2009 G20 summit, evidence of the need of political leaders for protection from anti-trade, anti-globalization protests from an angry, victimized people.
Hosted by UK Prime Minister Ramsay MacDonald, the 1933 G66 London conference was attended by 8 prime ministers, 20 foreign ministers, 80 finance ministers and central bankers, and only 2 heads of minor states - King Faisal of Iraq and Swiss President Edmund Schulthess. The 2009 London summit was attended by leaders of all G20 member states.
Within a month, the 1933 conference had collapsed, torpedoed by the opposition of the new US President, Franklin D Roosevelt, to any agreements that would restrict his freedom to act boldly to revive the US economy as part of the New Deal, essentially a domestic program. Historians have since suggested that the collapse of the 1933 London conference engendered grave political consequences from economic ramifications. France and Britain concluded that US domestic politics was beset with isolationism and thus was an unreliable ally for dealing with international problems. Germany's new Chancellor, Adolf Hitler, was forced by Anglo-Franco policy to seek solution from economic autarchy, the success of which enabled rearmament to wash away the national shame of defeat. Protectionist trade barriers of goods were made more destructive by competitive devaluation of currencies. Rising unemployment in market economies contributed to socio-political instability across Europe that eventually led to war.
The 2009 G20 London summit is no doubt mindful of the lesson of the 1933 G66 London conference. Participants leaned over backwards to project an image of cooperative consensus. Whether such a happy image bears any resemblance to unfolding economic reality is another question.
Despite the symbolic absence of President Franklin D. Roosevelt who purposefully went sailing, the US played a key role in the 1933 conference, just as it did at the 2009 G20 summit. In both gatherings, the US, despite being the most severely affected economy, was the most powerful participant. In both gatherings, the US was led by a new president. Unlike FDR, Obama appeared eager to go to London more to use the occasion to demonstrate his hitherto untested diplomatic skill by meeting publicly with key leaders of major countries than to demonstrate any greater hope for international cooperation than Roosevelt did.
As president-elect during the first G-20 summit in Washington DC in November 2008 hosted by lame-duck president George W. Bush, Obama said: "As this is a global economic crisis, a coordinated global response is needed. And yet as we act in council with other nations, we must act immediately here at home to address America's own crisis." In March 1933, FDR said in his inaugural address: "I shall spare no effort to restore world trade by international economic readjustment, but the emergency at home cannot wait on that accomplishment."
While Roosevelt appointed Secretary of State Cordell Hull, a strong advocate of free trade, to lead the US delegation, watched over by Raymond Moley, trusted FDR personal representative, the new president hedged his bets by letting private US bankers, led by internationalist James Warburg, to begin secret negotiations on currency stabilization with European central bankers led by Montagu Norman, the governor of the Bank of England. Hamburg born Warburg famously told the Senate Committee on Foreign Relations: "We shall have World Government, whether or not you like it. The only question is whether World Government will be achieved by conquest or consent."
National sovereignty has since emerged as the only effective defense on the part of weak economies against the predatory internationalism of the strong economies.
Obama’s Position on Trade
President Obama's position on free trade is hard to decipher since so far his words during election campaigns have not been validated by his actions in office. With NAFTA partner and Canadian Prime Minister Stephen Harper at his side, Obama said, “We have to be very careful about any signals of protectionism." And to Brazilian President Luiz Inacio Lula da Silva, he said: "Trade is an important engine for economic growth.”
China’s Bilateral Currency Swaps
At the 2009 London G20 summit, the Brazilian president, in a bilateral meeting with Chinese president Hu Jintao, proposed a bilateral currency swap to facilitate trade to be entered into during a forthcoming state visit to China in May.
A first step in this redirection of policy focus on domestic development is for China to free itself from dollar hegemony. This can be done by legally requiring payment of all Chinese exports to be denominated in yuan to stop the unproductive role of exporting for dollars that cannot be spent domestically without incurring heavy monetary penalty. Such a policy affects only Chinese exporters and can be implemented unilaterally by Chinese law as a sovereign nation, without any need for international coordination or foreign or supranational approval. (Please see my July 30, 2008 AToL article: Breaking Free from Dollar Hegemony)
Cross-border exchange of regional currencies is an important step toward circumventing a shortage of dollars and other currencies, as well as reducing exposure to exchange rate volatility. Developing countries in Eastern and Central Asia as well as South America are beginning to recognize the Chinese yuan as an appropriate currency for bilateral trade settlements. In some cases, the yuan is beginning to serve as a reserve currency for bilateral trade.
Central banks in China and South Korea signed a 180 billion yuan currency swap framework agreement on December 12, 2008. The People's Bank of China entered into a 200 billion yuan swap with the Hong Kong Monetary Authority on January 20, 2009; an 80 billion yuan agreement with Malaysia's central bank on February 8; a 20 billion yuan deal with the National Bank of Belarus on March 11, a 100 billion yuan swap with the central bank of Indonesia on March 24, and a 80 billion yuan swap with the central bank of Argentina. The swaps will allow the parties to avoid using dollars in trade between them and China. Additional central banks have indicated a willingness to enter currency swap agreements with China as well.
Currency swaps allow a central bank to inject a counter-party’s currency into its own financial system, allowing domestic businesses to borrow the other country's currency and use it to pay for imports of that country's goods, thereby easing the pressure on trade caused by an insufficiency of dollar. Technically, currency swap agreements are simply two-way loans between central banks. Foreign central banks generally use borrowed yuan to settle trades with China or as a reserve currency. China, on the other hand, uses foreign currency holdings as collateral. Consequently, regional circulation of the yuan expands with bilateral currency swaps. The system hinges on confidence in the yuan among all swap parties. As liquidity of the dollar, the generally accepted reserve currency for  international settlement since the establishement of the Bretton Woods regime in 1945, dries up in the current financial crisis, serious problems in credit and exchange rate risks have emerged. As a result, regional demand for trade settlement in local currency have appeared. As the currency of the largest economy engaged in the production of manufactured goods, the yuan naturally fills in as the preferred currency to respond to this demand. The scale of currency swaps is determined by market demand, not by currency hegemony.
“Buy American” Protectionism
Notwithstanding Obama's rhetoric against protectionism, a "Buy American" provision was left in his $787 billion stimulus bill; and in the $410 billion omnibus spending bill that sets the budget of many government departments together. And a NAFTA-created pilot program allowing limited fleets of regulated Mexican trucks to use US highways was cancelled, in response to which Mexico threatened to retaliate by imposing tariffs on US goods, ranging from Christmas trees to pet food and toilet paper. "It may be difficult for us to finalize a whole host of trade deals in the midst of an economic crisis like this one," Obama said in apparent appeasement to anti-trade labor leaders who constitute a central core of his political coalition.
Economic slowdown is increasing pressure for protectionism and insularism in domestic politics in all countries. The US is not exempt from such pressure, notwithstanding US exceptionalism. For an economy that has been benefiting most from international trade, even as some sectors of economy, such as manufacturing, have been forced into painful restructuring, such domestic political pressure grows at an particularly dangerous time, as collapsing global trade can force the economic downturn into a much deeper and long-lasting depression. Yet the predatory terms of trade constructed under neoliberalism have generated strong antitrade sentiments in all countries. Neoliberal international trade has become a class struggle issue between the financial elite and the working poor in all countries, rich and poor.
BRIC Countries
Unlike the US, the EU and Japan, the BRIC economies (Brazil, Russia, India and China) are in a position to take advantage of the fall in international trade to abandon excessive trade dependence to refocus on domestic economic development, if domestic political pressure manages to reject the free traders that have been running their economies to the ground for the past three decades.
China Adopts New Development Strategy
In the case of China, a general consensus is emerging that excessive dependence on foreign trade up to over 70% of its GDP is neither sustainable nor desirable. Much of China's developmental ills, such as wage stagnation, income disparity, regional imbalance, environmental degradation, are direct results of excessive dependence of foreign trade under current predatory terms of international trade under dollar hegemony.
International trade must be reformed to conform to new terms of trade so that trade will augment rather than obstruct domestic economic development. Under such new, equitable terms of trade, China can raise the domestic segment of its GDP to 65% and lower the foreign trade segment to 35% without reducing current trade volume. Unfortunately, trade denominated in a hegemonic dollar prevents China from utilizing sovereign credit in lieu of foreign capital to raise the domestic segment of its GDP without first allowing its foreign trade segment to shrink from the current global financial crisis. 
Free Trade Indefensible
The economic case for defending free trade in a global market economy is not universally shared while it is politically increasingly difficult to make to injured domestic groups bearing unevenly the pain while not sharing equitably in the benefits of trade. Global labor has been the prime victim of globalized international trade.
The state of the world's trading system is of prime concern to the Obama administration. Yet, there is little sign that the Obama administration is focusing on producing a truly salutary global trade regime that promotes balance and sustainable economic development for all. Ironically, to internationalists in the Obama administration, one frustrating feature of the current financial crisis is that it is so international in scope, leaving many elements and control points out of reach for US policymakers and even transnational financial institutions.
In a globalized interdependent economy operating still under the Westphalia order of independent sovereign nation states, national economies are falling into depression as connected units of a global economy without the benefit of world government. A revival of global trade without reforming the predatory terms of trade will remain an empty dream. G20 leaders need to understand that only economic development can pull the world out of this neoliberal financial morass of debt. Trade needs to be restructured to augment domestic development not to retard it. Protectionism against predatory trade is merely economic nationalism in a world order of sovereign nation states. Going forward, economic nationalism will continue to be the base, interdependence will only be the context.
US Populist Opposition to World Trade
In the US, Federal Reserve Chairman Ben Bernanke, appearing before the House Financial Services Committee, was warned by Chairman Barney Frank (D-Massachusetts) that it will be difficult to stop a rise in protectionist sentiment without more help for threatened workers. Congressman Frank noted a pattern of "people at the top of the economic pyramid being very critical of protectionists. We have had lectures that we should not give in to the instinct to try to favor American-made products and American jobs." Mr. Frank said free trade arguments will remain unconvincing "as long as the American people feel that they do not fairly participate on the whole in the benefits of trade" and until there is a "broader social safety net" to help workers who lose jobs and health benefits to global wage arbitrage.  This US protectionist sentiment is shared by the people of all other nations.
FDR’s Monetary Reform
In the 1933 G66 London Conference, conservative central bankers in Britain and France wanted to return to the gold standard to preserve the value of their currencies even at the cost of lower wages and price deflation. Most pre-Keynesian conservative economists argued that this approach, while temporarily painful, was the fastest possible way to end an economic depression.
FDR's New Deal chose to devalue the dollar to reduce the excessive debt burden and stimulate economic expansion with government injected liquidity through deficit financing. New Dealers had lost faith in Hoover's approach of financial orthodoxy. Conservative historians have since argued that Hoover, in hoping to win a second term, had in fact abandoned financial orthodoxy by intervening in the collapsing financial sector to ease the panic, thus robbing the market any chance of self correction. Still, massive financial pain showered on the masses is never acceptable in politics and particularly in an election year in a democracy. Further, Hoover was forced to compromise on financial orthodoxy in order to ward off the rise of communism in the US.
Unfortunately, Hoover began his monetary compromise to save capitalism too late and lost the election to Franklin D. Roosevelt. After the election, Hoover bitterly charged Benjamin Strong, President of the New York Federal Reserve Bank, a job held 7 decades later by Tim Geithner, now Obama's Treasury Secretary, with reckless placement of the interests of the international financial system ahead of US national interest and domestic concerns. Strong sincerely believed his support for European currency stabilization also promoted the best interests of the United States, as post-Cold War neo-liberal market fundamentalists also sincerely believe its promotion enhances US national interests. Unfortunately, sincerity is not a vaccine against falsehood.
The nature of and constraints on US internationalism after World War I had parallels in the rise of US internationalism after World War II and in US globalization after the Cold War. (Please see my November 27, 2002 AToL article: Critique of Central Banking - Part 3b: More on the US Experience)
FDR expanded the interventionist cure that Hoover had begun. On January 31, 1934, FDR by permission of Congress devalued the dollar, reducing its gold content by 40%. It was a "beggar thy neighbor" devaluation policy antithetical to the free trade ideas of Adam Smith. The first New Deal (1933-35), aiming at short-term relief programs for all groups, promoted economic planning in industry and agriculture in the Soviet style (some say the Italian Fascist style), and ran up against a reactionary Supreme Court. The second New Dealers (1935-38), including Justice Brandeis, whose fear of the stifling of free competition by big business was greater than his embrace of laissez faire, needed a respectable economic theory to support their spending program in an era of declining government revenue. They found him in John Maynard Keynes, through future Supreme Court Justice Felix Frankfurter, who introduced Keynes to FDR.
The New Deal legalized labor unios, established the Work Progress Administration (WPA) relief program, the Social Security Act, and programs to aid the agricultural sector, including tenant farmers and migrant workers. The Supreme Court ruled several programs unconstitutional. Most of the New Deal's relief programs were shut down during World War II by the Conservative Coalition. Many regulations were ended during the wave of deregulation in the late 1970s and early 1980s. Several New Deal programs remain active, with some still operating under the original names, including the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Administration (FHA), and the Tennessee Valley Authority (TVA). The largest programs still in existence today are the Social Security System, the Securities and Exchange Commission (SEC), and Fannie Mae, albeit most of these program have been modified to reflect the rise of neoliberalism in US ideology.

Market Fundamentalism and Inequality

Neoliberal market fundamentalist trade globalization has proved itself to be the mother of economic inequality. Bill Moyers, key participant in President Johnson's Great Society that was tragically aborted by the Vietnam War, in a June 3, 2004 speech: The Fight of Our Lives, given at the Inequality Matters Forum at New York University, said: "Astonishing as it seems, no one in official Washington seems embarrassed by the fact that the gap between rich and poor is greater than it's been in 50 years - the worst inequality among all western nations. Or that we are experiencing a shift in poverty. For years it was said those people down there at the bottom were single, jobless mothers. For years they were told work, education, and marriage is how they move up the economic ladder. But poverty is showing up where we didn't expect it - among families that include two parents, a worker, and a head of the household with more than a high school education. These are the newly poor. Our political, financial and business class expects them to climb out of poverty on an escalator moving downward."  

The inequality that Moyers rightly protests about did not start with the Republican second Bush administration. It started with the Democrat Carter administration's deregulation policies and the neoliberal free trade policies of the two-term Clinton administration and Clinton's adoption of the "Third Way" radical centralism approach promoted by British sociologist Anthony Giddens. The overall aim of the Third Way is, in Giddens's own words: "to help citizens pilot their way through the major revolutions of our time: globalization, transformations in personal life and our relationship to nature." Unfortunately, the Third Way
proved to be of little help to the victims of globalization or to protect nature from wholesale damage.

New Deal Protectionism

All through the New Deal, FDR protected threatened sectors of the economy, particularly agriculture, that had been hardest hit by the depression. Aware of the history of the struggle by the agricultural populists against the Gold Standard in favor of silver, FDR sent  a devastating telegram to the 1933 London G66 conference accusing it of bad faith and repudiating any attempt to get a deal to fix the value of currencies.  "I would regard it as a catastrophe mounting on a world tragedy," FDR said, "if the conference should allow itself to be diverted by a purely artificial and temporary experiment... the focus on [currency] stabilization shows a singular lack of proportion and failure to remember the larger purposes for which the conference was called."  And, he added that "the old fetishes of so-called international bankers are being replaced by efforts to plan national currencies" around domestic needs. FDR's telegram, popularly received in the US, caused the collapse of attempts to reach a coordinated international approach to the crisis.
For the organizers of the 2009 London G20 summit, the lesson of 1933 is that boosting market confidence by maintaining a united front in the face of the global recession has to be a key objective, independent of concrete policies that may well fail to reach agreement. Critics of summitry warn that the risk of failure, and its negative effect on confidence, is greater than the potential gain from a soothing image of international cooperation.
History has shown that international cooperation is achievable only through the strong leadership of a dominant power with the economic and political strength to enforce a new world order. The international politics of US hegemony was behind the success of the Bretton Woods regime of 1944 which imposed the dollar as the world reserve currency for trade and created the IMF as the international lender of last resort and the World Bank as the financing institution for the development of poor economies. Similarly, hegemonic leadership in the 1950s successfully initiated world trade negotiations and created the World Trade Organization.
But in the current financial crisis, as it was during the Great Depression, a weakened US has neither the economic strength, the financial resources, the political will not the moral righteousness to be the lead organizer of a new world economic order. "By any measure, the London summit was historic," President Obama declared grandiosely after the one-day summit. The Wall Street Journal headline on the day before the summit read: "Global Slump Seen Deepening." And on the day of the summit, the WSJ headline read: "Obama Hits Resistance at G-20" The need for broad consensus is not a new US policy epiphany; it is merely US response to reality.   Unipolarity is finally being replaced by multipolarity in global geopolitics. In that sense, the 2009 G20 London summit was indeed historic. 
In defense, Obama admits: “We won't solve the problem of the world in one summit.” Yet even a clear definition of the problem has escaped two summits thus far. The next summit is reported to be held in New York in September.  No one expects the world economy to be in better shape by then and the prospect of more violent protests by angry citizens than those in London is very real.  By then Obama would have worn off the excitement of being a new leader on his maiden diplomatic excursion and all world leaders may well be suffering from summit fatigue while the world economy sink deeper in crisis from its own structural contradictions.
April 9, 2009