Nice analysis Ken. I think the remedies you suggest would be much better than nothing.

However it seems to me that a small transaction tax (Tobin tax) would be the most effective for the least effort - a tax just large enough to take most of the profit out of currency speculation. Perhaps 0.1%. My estimates are that this would cut out 98-99% of currency trading, stabilise exchange rates and channel funds back into the productive economy, with all the benfits you mention. See my book Economia http://betternature.wordpress.com/economia/ (and follow the link there).

The main reason the Bretton Woods was scrapped was because it was a major obstacle to free trade.

Returning to the Bretton Woods system would most likely be equivalent to adding a 4% tariff.

Likewise the major benefits of the EU common currency also required relinquishing significant national budget control away from government control to central bankers, (and a free market to determine the initial peg rates).

When I saw this school boyish economic analysis I had to look into the source, and lo and behold, Ken Mckay is a labor advisor and trade unionist. Assigning goverment control to everything is their mantra, and their toxic influence has taken decades to undo.

Likewise Geoff, a transaction tariff is a sure way to cap the money flow and precipitate another GFC credit crunch.

Ken McKay warns against treating the symptoms instead of the disease and then proceeds to ignore his own advice.

By definition, a *derivative* is the wrong place to look for the *origin* of something. The purpose of a derivative is to hedge risk in the underlying contract. The bigger the risk in the underlying bubble, the bigger the derivative bubble.

Yet Ken somehow decides that the derivatives bubble is the disease that needs to be treated, by trying to rig the price of money even more than it is rigged by government controlling its supply! If we start with a flawed theory, we will end with a flawed conclusion, as Ken does.

According to his theory, the derivatives bubble is an artefact of floating exchange rates. It has nothing to do with the underlying credit expansion.

The elephant in the living room is the Federal Reserve. The Fed caused the GFC, including the derivatives bubble. The instability of exchange rates is a symptom of the underlying attempt by government to sabotage the money supply for its own purposes.

Government control of the money supply is always inflationary. Inflation always causes the cycle of boom and bust. Depression is the unavoidable aftermath of credit expansion. Inflation does not add anything to the amount of resources available. It makes some people richer at the expense of others, and the net result is always negative.

But the interventionists are married to government control of the money supply because they see it as the way to conjure away the scarcity of capital goods, to lower the rate of interest, to finance lavish government spending, to expropriate the capitalists, and to contrive everlasting booms.

No matter how much the interventions produce negative outcomes, the interventionists hold fast to their irrational belief that even more intervention is the solution.

The underlying assumption is that the Ken McKays of the world are cleverer than all the rest of the world put together. To work, Ken would need to know the difference between the market price, and what it should be, in every single transaction.

Okay Ken: how?

From the article “The trade in complex derivatives effectively created a black market fiat monetary system that almost brought capitalism to its end.”

That trade was started by socialist minded people in the US Democrat party forcing banks to lend to those who had no intention of respecting their financial commitments, all in the name of “equal opportunity” and “affirmative action” under Clinton.

Although the US Republicans opposed the policy, by the time Bush came to power, it was too late to change what had been set in motion.

When the “jingle mail” laws allowed people to walk away from their fiscal obligations, government established organizations like Fannie Mae and Freddie Mac, who financed this exercise in fiscal stupidity were left holding a lot of zero-valued paper which they then tried to pawn off to banks as “derivatives”.

The collapse is a classic in “government attempt at engineering” of the finance system and illustrates why any government should be hands off in dealing with the matters of commerce and why regulation needs to be widely accepted (by those who understand their business) and tested before it is enacted.

As for fixed exchange rates..

Rubbish… when exchange rates are “fixed”, "trade" is unduly influenced by the “fix”.

One problem of recent years has been the Chinese desire to keep the yuan artificially low by pegging it to the US Dollar (as an net exporter is works for them).

It is the same in any market Whilst free market exchanges are subject to some fluctuation,such changes are less significant to when a government tries to play “God”

As dearest Margaret said

"Whether manufactured by black, white, brown or yellow hands, a widget remains a widget - and it will be bought anywhere if the price and quality are right. The market is a more powerful and more reliable liberating force than government can ever be."

Exchange rates reflect money market widgets.

We need a new Bretton Woods like we need new tariffs and import quotas.

Free trade = fluctuating currency, for the benefit of all

Shadow-Minister - Nicely put

Yes let's implement more of Keynes' hair brained fantasies. You do realise it was Keynes who pushed for the removal of the Gold standard, and the introduction of foreign exchange? Given this fact surely it is one of his "ideas" which will fix the mess he created.
Nice one.

It's funny how government advisers think the only way to fix anything in this world is through more taxation, resulting in further irresponsible spending by socialist governments, and more regulation/power for the ruling elite.
I understand though, since how else does one get paid in such a profession without being a yes man?

You had me going there when you were listing some of the causes of the GFC (except for the too big to fail thing), but then the piece rapidly degenerated into the usual Keynesian mumbo jumbo of power and control for the "elite" ruling class (aka scumbag politicians)who were born to lead.

In my experience of derivatives markets (which is extensive as I have worked in them for many years) a number like $50 Trillion is based on the notional value of the deals. Therefore this is not actual cash (known as a nominal value) being invested, or gambled as you see it.

It seems somewhat disingenous to claim that they are gambling the money, as hedging is designed to ensure if market prices move against you, there is still income to cover the loss on the market.
This type of activity is more commonly known as insurance.

Also, foreign exchange while clearly being the biggest derivs market, is not the only market.
So companies who consume any commodity are also hedging on the price of sugar, corn, gold, even freight costs. It's a fact of life that prices move (as a result of Keynesianism). Shall we ban or tax them too for protecting themselves?

Shadow Minister,

Bretton Woods was a barrier to trade was it? why then under the Bretton Woods Regime did the value of world exports increase by 119% from 1950-1960. Can someone pass the dunce cap to the shadow minister please.
IMF working paper demonstrated that institutional monetary policy far more effective in increasing market integration than instrumental monetary policy, please pass the dunce's cap to the Shadow Minister.
Exchange volatility dampers international trade, by definition Bretton Woods system resulted in exchange rate variability of 1%. Floating exchanges rates for some currencies has led to variability of up to 33% over 12 months. Again please pass the dunce's cap to the Shadow Minister or maybe Col Rogue should win this one I'll let them share it. With a guaranteed risk of 1% exchange rate variability under Bretton Woods little need for gambling/insurance is there? Rechts picks up the Dunce's cap on this one.