Paul Volcker's monetary omission and challenge

Finally the Obama Administration is making clear where it stands in terms of financial reform by way of Paul Volcker’s OPED piece in Sunday’s New York Times. Hopefully, president Obama himself engage himself in this reform with far more gusto than the warmed-over reformist proposals from his Clinton and Bush holdovers. It was they—Summers, Geithner, Bernanke—who, in their deregulatory zeal, contributed to the near financial collapse in the US and abroad. It was they who, with diminished regulatory zeal but still sizable belief in market fundamentalism, engaged in bailout programs that, unfortunately, did not address the real causes of this major market failure.

There is, however, one important monetary issue that was not addressed in the Volcker article and that has hardly been featured in the Obama Administration’s post-crisis monetary/financial policies. The proper resolution of this monetary issue would resolve not only the vexing problem of global financial imbalances, but also free up hundreds of billions of financial resources, particularly in developing countries. In its transformational version, the resolution of the monetary issue of global reserves could become a most important element in coping with the climate crisis because it would create an institutional channel for funding climate mitigation and adaptation measures.

The reformist version of a new global reserve system is presented by Professor Joseph Stiglitz, who, as chair of the Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System, recommended part of such system in June 2009. For many years he has been writing and speaking on the need of a reserve system that is not based upon a national currency such as the US dollar or the euro. In his latest book, Freefall. America, Free Markets, and the Sinking of the World Economy (pp231-4) he points to the need for the Obama Administration to include in its financial reform proposals the monetary renewal of having a new global reserve currency that is not nation based. By being willing to replace the US dollar as the main international reserve currency the Obama Administration would not only cause many benefits to flow to the US economy and society, but also to global economic system. It would free up the hundreds of billions of dollars that are presently being held, particularly by developing countries, to be used for their local economies. They could even invest some of them at interest rates that would be about 6x times higher than the 0.5% of their presently held T-bills.

The transformational version of this new global reserve system has the same benefits as the reformist version: it resolves the global imbalances, boosts global aggregate demand by providing greater purchasing power to developing countries and would place the US monetary, financial, economic and commercial system on a sound footing, thus improving those systems globally. However, it would take one gigantic step forward by basing the non-national international reserve currency not on an outdated gold standard, but on 21^st century a carbon standard. This de-carbonization monetary standard is based upon an integrated set of 15 energy items using information from the recent publications of climatologist James Hansen and journalist Al Gore.  It is part of the Tierra Fee & Dividend (TFD) system that stands in opposition to the cap-and-trade systems that Europe and, probably the US, have, unfortunately, adopted. The unit of account of this de-carbonization monetary standard is called the Tierra, Spanish for Earth. Annually, these Tierras would be allocated to each adult (and adolescent?) and become part of a nation’s carbon account in its balance of payments. While the resolution of global financial imbalances is an urgent and complex challenge, the resolution of the global carbon or ecological imbalances is similarly urgent and complex. Working towards the establishment of a Tierra Fee & Dividend system would set the global monetary, financial, economic and commercial systems on the right track in the urgent resolution of both types of global imbalances.  

Note that initially these Tierras would be functioning as a reserve currency, but nations that are signatories to the Tierra International Clearing Union Treaty, can decide to have those Tierras function as a vehicle currency. This phase 2 of the TFD system would result in having the Tierra become a world currency that has organically and democratically emerged by the political will of nations, business and civil society in a joint search for equitable, sustainable, and, therefore stable international systems in finance, business and commerce.

The annual allocations of the Tierras have some resemblance to the emissions of SDRs by the IMF that the G20 have been considering. Mr. Soros, at the recent Copenhagen conference, suggested an allocation of $100 billion of SDRs to be allocated via the IMF’s quota system. Such allocation, if not translated into grants to developing nations, does not contribute to the resolution of either the global financial and ecological imbalances.  The Tierra allocations on the other hand take place within a transformed international monetary system that would contribute to both types of global imbalances. Are Mr. Volcker and the Obama Administration able to take this gigantic, i.e. transformational step forward? Are they, together with Mr. Bernanke of the Federal Reserve, willing  to confront the bailed out financial system and their Congressional lobbyists and to educate the US public and Congress about the opportunity of using a re-configured dollar as the pivot for a transformed international economic order?

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