My worst fears about the weekend gathering in Washington of world leaders to
discuss the financial crisis were realized overnight when the statement after
their meeting was released. It contained a host of generic fluff and very
little mention of the specific actions required to tackle the gargantuan
economic problems of today.
The statement accompanying the meeting, held under the Group of 20 (G-20)
banner, could have been put together by a bunch of first-year economics
students. It probably was, but that's not what worries me about the initiative.
In the opening part of the statement, the following section seemed positive:
"Our work will be guided by a shared belief that market principles, open trade
and investment regimes, and effectively regulated financial markets foster the
dynamism, innovation, and entrepreneurship that are essential for economic
growth, employment, and poverty reduction."
After paying lip service to the idea of free market principles in the
introduction, every aspect of the statement from then on relates to market,
fiscal and monetary intervention on an epic scale by the assembled bureaucrats.
In the next section on "root causes of the current crisis" is the following
gem:
Major underlying factors to the current situation were, among
others, inconsistent and insufficiently coordinated macroeconomic policies,
inadequate structural reforms, which led to unsustainable global macroeconomic
outcomes. These developments, together, contributed to excesses and ultimately
resulted in severe market disruption.
Right there you have the
prevailing notion that government intervention is what will help the global
economic system recover; indeed it was the absence of dialogue between these
super-smart folks that led us to the current swamp. In related news, pigs were
seen flying over Washington all day, but I digress.
Discussing "Actions taken and to be taken", the statement goes on to say the
following, laying the grounds for justifying pretty much any action by any
government anywhere in the world but more importantly also bringing in the
widely discredited multilateral agencies such as the International Monetary
Fund (IMF) back into the global picture: "As immediate steps to achieve these
objectives, as well as to address longer-term challenges, we will:
Continue our vigorous efforts and take whatever further actions are necessary
to stabilize the financial system.
Recognize the importance of monetary policy support, as deemed appropriate to
domestic conditions.
Use fiscal measures to stimulate domestic demand to rapid effect, as
appropriate, while maintaining a policy framework conducive to fiscal
sustainability.
Help emerging and developing economies gain access to finance in current
difficult financial conditions, including through liquidity facilities and
program support. We stress the International Monetary Fund's important role in
crisis response, welcome its new short-term liquidity facility, and urge the
ongoing review of its instruments and facilities to ensure flexibility.
Encourage the World Bank and other multilateral development banks (MDBs) to use
their full capacity in support of their development agenda, and we welcome the
recent introduction of new facilities by the World Bank in the areas of
infrastructure and trade finance.
Ensure that the IMF, World Bank and other MDBs have sufficient resources to
continue playing their role in overcoming the crisis."
Right here we have the makings of a return to the world economic order of yore,
namely for the governments of the Group of Seven (G-7) leading industrialized
nations to continue their spendthrift ways banking on the savings of emerging
countries, while the latter remain happy in their role as supplicants to the
global economy rather than assuming a leading role as is warranted by current
fundamentals.
The return of international finance's Terrible Twins is further proof of a
hankering for the orthodoxy of export-oriented emerging economies securing
access to financing as arranged by these shoddy bankers. It is amazing to me
that countries like South Korea, Brazil and India signed up to this nonsense
despite the very real structural problems created by these very programs in the
recent past for these countries by the IMF.
Against these ideas there is an alternative of emerging countries floating
their currencies and relying on internal consumption, which would predicate
increased capital inflows for emerging countries at the cost of increasing
capital costs for G-7 members. This option was apparently never even brought up
in the meeting.
Secondly, the idea that emerging countries face multiple tariff barriers that
keep millions in poverty was also not sufficiently discussed in the Washington
meeting. To wit, Europe's Common Agricultural Policy (CAP) is singularly
responsible for the poverty, starvation and malnutrition of millions of people
in Africa and Latin America, yet there was not a mention of this unfair trade
barrier in the Washington meeting. Instead, the idea of circling back to the
status quo in one form or another appears to have taken precedence.
Reforming financial markets
Something must have gone wrong in Washington because the next section of the
statement relating to financial system reforms actually makes sense in places.
I am guessing this was simply an oversight by the assembled officials; actual
implementation will probably fail to follow any of the principles laid down.
Paragraph 9, which details the common principles of reform, has the following
five guiding headlines:
1. Strengthening transparency and accountability.
2. Enhancing sound regulation.
3. Promoting integrity in financial markets.
4. Reinforcing international cooperation.
5. Reforming international financial institutions.
I am really happy to note in this section that European attempts to reduce
disclosure on financial assets by banks have come to naught. The 2009
leadership of Brazil, the United Kingdom and Korea to implement a series of
recommendations will coordinate the G-20 Finance Ministers Group. Personally, I
found that trio an odd choice, with only Brazil having a functioning financial
system not overwhelmed by near-term liabilities. Then again, finding countries
with relatively unstressed financial systems is a fairly difficult matter and
perhaps the assembled leaders wanted to have people with sufficient experience
of pain - for example the UK - participating in the recovery plans. That seems
fine overall. The specific areas of recommendations being laid out are as
under:
"Mitigating against pro-cyclicality in regulatory policy.
Reviewing and aligning global accounting standards, particularly for complex
securities in times of stress.
Strengthening the resilience and transparency of credit derivatives markets and
reducing their systemic risks, including by improving the infrastructure of
over-the-counter markets.
Reviewing compensation practices as they relate to incentives for risk taking
and innovation.
Reviewing the mandates, governance, and resource requirements of the IFIs
[international financial institutions].
Defining the scope of systemically important institutions and determining their
appropriate regulation or oversight."
The next section on Open Global Economy isn't worth reading, containing as it
does platitudes about the World Trade Organization, the Doha round and so on
without any substantive discussion on handling current conflicts on tariff
barriers and capital flows.
The rest of the document deals with specific recommendations relating to the
implementation of the five principles of reform as laid out previously. Of
these, the move towards accounting standardization will help resolve a number
of capital flow constraints, regulatory arbitrage and other egregious misuses
of fiduciary principles in the financial markets.
Another welcome initiative in the financial market section is the reform of the
over-the-counter market for credit default swaps (CDS), which will almost
surely move to an exchange-traded or electronic trading format in the next few
months. The need for this market is paramount more now than ever before, and I
am happy that the G-20 has understood the rationale for a continued broadening
of this market, rather than a reversal or even a shutdown as was suggested by a
number of government officials in the US and Europe of late.
Missed opportunity
Overall, the G-20 meeting strikes me a missed opportunity for discussing a
broadening of the world's economic engine by inculcating stronger measures
towards consumption in emerging countries and moving them away from the
IMF-orthodoxy of remaining suppliers of cheap goods to developed countries.
Failures in the financial system need to be addressed, but the root cause of a
misallocation of capital from high-growth areas to lower-growth areas, that is
from savers in countries like China, Brazil and India to the overextended
consumers and pensioners of the US and Europe, was not discussed let alone
addressed.
The coming wave of Keynesian spending across the world will only intensify this
misallocation of capital as emerging countries continue to hold nearly
worthless pieces of government debt issued by G-7 countries in return for
vacuous promises of continued economic growth.
Then again, perhaps it is not the G-7 countries that are to blame for
suggesting ways of keeping themselves economically relevant; such moves after
all reflect their self-preservation instinct. What galls me is that leaders of
countries such as Brazil, China and India bought into this malarkey.
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