Sarkozy Wants To Clip Banks' Wings
Friday, January 29, 2010

French President Nicolas Sarkozy has told a meeting of the World Economic Forum (WEF) in Davos that fundamental changes to global capitalism are needed if a repeat of the financial crisis is to be avoided, including new rules to stop banks and their hedge funds from "speculating," and an end to freely-floating currency regimes.

In his opening address at the WEF Annual Meeting, Sarkozy said that it will not be possible to emerge from the global economic crisis and protect against future crises if the economic imbalances that he argues that are at the root of the problem are not addressed.

“This is not a crisis in globalization; this is a crisis of globalization,” he said. “Finance, free trade and competition are only means and not ends in themselves.”

Sarkozy said that he agreed with new restrictions on the size and scope of financial institutions announced by US President Barack Obama earlier this month to rein in "excesses" by financial institutions, protect taxpayers and usher in greater stability in the financial system.

Sarkozy added that banks should stick to analyzing credit risk, assessing the capacity of borrowers to repay loans and finance economic growth. “The role of the bank is not to speculate,” he remarked. “President Obama is right when he says that banks must be dissuaded from engaging in proprietary speculation or financing speculative funds."

He also questioned the rewarding of high compensation and bonuses for CEOs whose companies lose money. Capitalism should not be replaced but it has to be changed, the French president declared. “We will only save capitalism by reforming it, by making it more moral.”

However, the French President suggested that such reforms could only be truly effective if brought in at a global level. "If competition is skewed by prudential rules that remain very different from one country to another, if we cannot coordinate our efforts, how can we be surprised that so many players consider it normal to return to the habits they had before the crisis?" he asked.

Obama has proposed to work with the US Congress to pass legislation that would prevent a bank or financial institution that contains a bank to own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

The world’s currency regime is central to the issue, Sarkozy contended as he called for a new 'Bretton Woods' system. He said that exchange rate instability and the under-valuation of certain currencies lead to unfair trade and competition. “The prosperity of the post-war era owed a great deal to Bretton Woods, to its rules and its institutions. That is exactly what we need today; we need a new Bretton Woods.”

The Bretton Woods system compelled countries to maintain their exchange rates within a fixed value according to the price of gold in the years following the end of World War Two. The system collapsed after the US unilaterally pulled out of the regime in 1971.

Sarkozy said that France would place the reform of the international monetary system on the agenda when it chairs the G8 and G20 next year.