Opinion

The Great Debate

G20 summit shows lack of resolve

November 17, 2008

John Kemp Great Debate–John Kemp is a Reuters columnist.  The opinions expressed are his own–

The G20 summit must be considered a disappointing failure, even by the relatively low expectations set for the event. Leaders produced a long agenda of further studies, reports and work, but failed to provide a clear direction or tackle even the most fundamental decisions.

On the key issues, leaders displayed a worrying irresolution. Without unambiguous instructions from the top, discussions between finance ministers and officials will prove protracted and risk getting bogged down in detail. Negotiations between officials can fill in the details; they cannot make the kind of fundamental choices about strategic direction that leaders avoided at the weekend.

A SENSE OF HISTORY

The summit has been bedeviled by comparisons with the Bretton Woods conference in 1944. Intended as a rhetorical device to restore confidence by suggesting governments were taking bold action in an unprecedented spirit of agreement, the ghost of Bretton Woods has raised impossible expectations and distracted both leaders and officials from the real issues facing the global financial system:

(1) The three-week conference at Bretton Woods was the culmination of more than two years of detailed work at official level and more than a decade studying the issues. There was substantial prior agreement about the problem (poorly coordinated monetary and fiscal policies, leading to payment imbalances and protectionism) and the solution (a gold-exchange system, with multilateral surveillance of national policies, and national reserves supplemented by IMF drawing facilities on a conditional basis).

The system was buttressed by a new multilateral development bank to help fund infrastructure and post-war reconstruction, and later by the General Agreement on Tariffs and Trade (GATT) to prevent a slide back into protectionism.

Comparisons with Bretton Woods thus created unrealistic expectations of what top-level leaders would be able to achieve without detailed preparatory work.

(2) The more serious problem is that the comparisons frame the issue in the wrong way and encourage leaders to pursue the wrong solutions to the wrong problems.

Bretton Woods occurred against the backdrop of the Great Depression – when countries had tried to defend fixed gold parities by raising taxes, cutting expenditure, and hiking interest rates to deflate domestic demand and cut imports, while introducing trade barriers to reduce deficits and limit outflows of bullion.

The current crisis is very different. It is occurring under flexible exchange rates, not fixed ones. No one is suggesting governments raise interest rates, hike taxes or cut expenditure to maintain the external value of their currencies rather than support domestic demand. Most countries seem quite happy with depreciation and easy monetary and fiscal policies.

But the ill-conceived comparisons with 1944 have caused leaders to focus on the spectre of renewed trade protectionism and the need for international policy coordination – while more targeted but relevant proposals to improve financial regulation risk being lost in a sea of other ideas.

Like generals fighting the last war, the G20 leaders seemed more comfortable solving the problems of the 1940s than the 2000s.

FAILURE OF WILL

The summit made some progress agreeing on the nature of the problem and locating it in the financial system: “weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system”.

The communique went on to note: “Policymakers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications”.

However the real problem was not a failure of understanding but a lack of regulatory will:

(a) Long-Term Capital Management’s collapse highlighted the systemic risks posed by highly interconnected institutions as long ago as 1998.

(b) Enron’s demise in 2001 showed the risks arising from the use of off-balance sheet vehicles that were only independent entities in a narrow accounting sense but risked being consolidated back onto the parent company’s balance sheet in a crisis.

(c) The Commodity Futures Trading Commission (CFTC) warned about over-the-counter derivatives with poor transparency, limited oversight and unknown risk concentrations in the late 1990s, but was banned from trying to regulate them, partly at the behest of the U.S Treasury and Federal Reserve.

(d) With subprime mortgages, the Fed had been aware for several years about a relaxation of lending standards, but regulators did not nothing beyond issuing half-hearted warnings.

(e) Repeated warnings about serial asset market bubbles and the over-inflation of house prices were dismissed by the Fed as localised “froth”. Officials preferred to provide post-crisis relief rather than interfere with market mechanisms to prevent bubbles inflating in the first place.

Each time regulators attempted to quantify risk or force financial institutions to adopt more conservative practices, they were seen off by heavy lobbying from the major investment banks and insurance companies.

Top policymakers, from Greenspan downward, systematically dismantled regulatory safeguards that had been in place since the 1940s.

With no support from the top, junior regulators appear to have given up trying to enforce even the existing rules and were forced to adopt the interpretations most favorable to the institutions they were meant to be regulating. Wall Street controlled the regulators, rather than the other way around.

Adding to the pressure, the major financial institutions were able to successfully arbitrage among regulators in different countries, and even between different regulators within the same country. Tough rules-based regulation by the SEC was contrasted unfavorably with the light-touch principles-focused regulation adopted by the CFTC and Britain’s Financial Services Authority.

Regulators themselves seemed more anxious to promote the competitiveness of their local jurisdictions in a race to grab market share by offering the lightest touch – which often meant no effective regulation at all.

It was this regulatory arbitrage and capture of the regulatory authorities by the institutions they were supposed to regulate that lay at the root of the crisis. While G20 leaders seem to understand this, their response suggests a hesitancy that could be fatal to reform.

LITTLE THRUST FOR REFORM

There is a brief mention in the communique of the need to strengthen regulation and avoid regulatory arbitrage. But too many proposals in the document are either irrelevant or reveal a disinclination to challenge the status quo.

Proposals for a “college” of supervisors to assess risks in large cross-border institutions look like a solution to the lending crises of the 1990s (when institutions failed to understand their aggregate country exposure) rather than the 2000s (when the crisis largely stemmed from risk concentrations in a single country and a single financial system).

Proposals to examine the pro-cyclicality of regulatory policies and the valuation of illiquid securities suggest a willingness to accept industry efforts to blame accounting treatments and capital requirements rather than poor lending. Asking the Basle Committee to help firms’ new stress-testing models is a fairly ineffectual response to the wholesale failure of risk management processes the crisis has revealed.

Calls to avoid regulatory arbitrage were coupled with the need to “support competition, dynamism and innovation in the marketplace”. No one could argue against the importance of innovation, but the very mixed remit gives finance ministers and officials no real support for toughening regulation.

The communique lacks focus, with favorite but irrelevant themes about terrorist financing, uncooperative tax havens, voting reform at the IMF and completing the Doha round of trade negotiations all making an appearance. While these are worthy objectives, rolling them all into the communique has simply weakened it.

The G20 was timid and confused where it needed to be bold and clear. As ministers and officials sit down in a dozen working groups to discuss detailed reforms, they are more likely to tinker with a failed system than produce a successor to Bretton Woods.

Comments
22 comments so far | RSS Comments RSS

This must be one of the dumbest articles ever written!

Obviously they can’t commit to anything, and expecting them to do so reveal a severely limited understanding of how things work.

Most “world leaders” don’t have a mandate to commit to anything major. Democracy remember??

OK, I expect you now this, so why this article?

Posted by Emanon | Report as abusive
 

Lets cut the BS out! Govts. should not spend more than they have nor let people sell phoney securities based on air. The housing problem is based on people buying houses valued at twice to three times their ability to pay or income. The cars are throwaway junk. Cars from the 50ies got better milage and lasted longer than the overpriced junk of today. If GM and Ford wants to make junk then let them FAIL. We need cars that last and get as good milage as cars from the 1950ies. John

Posted by John Dinneny | Report as abusive
 

G20 summits have often been found as failure because, as per various reliable media sources, here the participants seldom undertake serious talks, rather they get busy in holiday making luxuriously and talk of their respective riches avoiding talks on global serious economic or other similar issues for which this global organization was formed in real sense.

Posted by A.R.Shams | Report as abusive
 

No person living on this earth believes that G 20 will solve the problems that affect this world today.The americans started spending their money as if there is no tomorrow,the biggest debtor coutry of this world has no right to do so ,sanity is a forgotton word in USA.Instead of G 20 what the americans require is the grandmother stories that extolled the virtues of savings and rationale spending.Now since they are in the morass of their creation they want the whole world to pay for it…..Long live insanity of USA

Posted by Rajesh thakkar | Report as abusive
 

John, agreed except for the mileage…. the mileage of today, I believe, is similar to 1973, but same difference and point made. We The People, too, have known about oil shocks since the 1970s, but tell people to save energy and you were classed as a tree-hugging liberal… When I was last in the USA, I found people went shopping and left their engines running the whole time. True it was MA in winter, but it was about 45° F out. I tried to get people to shut off their cars (it’s bad for the engine to idle that long), no doing… just got dirty looks. 2 weeks later we were at war with Iraq.

The problem with the G20 is it’s a club of rich people doing poplitics for the rich and mighty. They don’t give a hoot about anyone else, but they are forgetting that the Street can be powerful and vengeful as well.

They are looking for a solution? Let the multi billionaires and the oil companies bail out GM and Chrsyler. They have the money. Taxpayers have just been milked to the nth generation.

Posted by Talleyrand | Report as abusive
 

Appreciating when the G-20 agreed that there is global financial instablity, leading to distress in the world economy. The challenge remains for the LEADERS of NATIONS to seek the rules of democracy, adequate consultations and application of principles to salvaging its effect among common community.

Posted by OHIARA I.C | Report as abusive
 

The G20 are worried about maintaining financial markets and large industries in their respective nations. These entities are a source of significant employment. When certain of these nations bowed to pressure from these major industries to deregulate or forgo necessary regulation, said governments represented the position of industry. Those very industries are now seeking financial assistance to bail themselves out of the very mess that government acquiesced to.

The definition of a fascism is when government represents the interest of large industry. Though generally ruled by a dictator, such a government can also be ruled by a small class of the wealthy (industrialists). Plutocracy and Oligarchy come to mind. Karl Marx stated ” Fascism is a symptom of a capitalist society in decline”. Does this circumstance sound vaguely familiar?

The perverse form of free market global capitalism that exists today is incapable of directing capital to where it is needed(sustainable use of resources, green renewable energy, affordable health care…). These issues, if left unaddressed, threatens our very survival as well as most life on this planet. Trying to preserve the existing economic system is to maintain those in power and embark the same path that has lead to where we are. Einstien stated ” One can not continue to perform the same actions and expect a different result”. The feudal system of societies eventually was replaced by something new that lead to capitalism. I believe capitalism awaits a similar fate. All of humanity must chart a new path.

Posted by Anubis | Report as abusive
 

Usually, these G20 meetings are little more than hand-shaking and posing for a group-photo. In this case it was two=photos because the Argentine president arrived late for the first-one.

Posted by Richard | Report as abusive
 

G20 is a sort of Gymkhana club for rich people from rich countries of the world to meet and enjoy.

Posted by A.R.Shams | Report as abusive
 

Look what you’ve missed – badly, IMO – Bush set at head of the table with Da Silva nd Hu Juntao. Thereby, for first time, recognizing the relevance of the emerging markets (BRICs).

G-20 is NOT a rich man’s club. OECD was after WWII and until it started becoming relevant by adding S Korea, Brazil and other’s.

Globalization has moved millions of poverty-stricken masses into better than subsistence existence – even if its about $2.500 per head. That’s a fantastic progress over thirty years of triffs and trade negotiations under Gatt/WTO.

If Gordon Brown didn’t get his fiscal policy coordination accepted by G-20 – implies that emerging markets are more pragmatic and understand you can’t fix global developments by a standard fiscal measure across-the-board. It might work in UK – Germany doesn’t approve of it either, as an agrred agenda going forward under Bretton Woods II.

What you’ve compltely missed and forgotten is that G-20 have agreed on a formal agenda and assigned working groups to develop the policy framework and report back to their next session in 101 days after inauguration of new US Admin – most probably in Europe.

From experience with such Declarations, I can assure you we’ve seldom achieved a political consensus on such difficult international finance policy issues.

This times it seems like realpolitik…give it time and you shall have to eat your foolish words.

Posted by hari | Report as abusive
 

The most compelling revelation arising from the global crisis is that the the worlds business and political leaders are actually men of straw. Let us be clear about the fact that the crisis is a consequence of incredible stupidity on the part of businessmen and politicians. It is quite simply unreasonable to expect this toxic symbiosis of fools to formulate enduring and coherent solutions.

Posted by anton kleinschmidt | Report as abusive
 

Whhheeeww, I don’t want them to decide anything for me and my country.

Posted by jason | Report as abusive
 

This does not bode well for the collective futures of these nations, or our world. We are, in fact, witnessing a combination of apathy and inability here- not caring about the global realities, and a clear lack of leadership at a time when it’s needed most.

This meltdown of economies will lead to a disintegration of national and international cohesiveness that once held our world together, for common good. Now? We have seen the enemy, and it is us.

Posted by Rick | Report as abusive
 

It’s the FED, stupid.

Go educate yourself about why this is being purposefully orchestrated by the FED, and why the G20 leaders are powerless to do anything about.

Google, “Aaron Russo” and watch his documentary “Freedom to Facism”

Posted by Whowhowho | Report as abusive
 

Our leaders are just as clueless as anyone else – How can we save the economy? I say, let the failing companies fail. This is a good time for consolidation and the survivors will realise that they have to conduct their business properly going forward

Posted by Kelvin Leong | Report as abusive
 

I agree – you’ve laid out the causes and effects. But where is the solution ? What SHOULD be done ? banning derivatives is too late. Pumping cash into banks merely enboldens fraud. So what’s the solution ? I haven’t read or seen any brainy analyst attempt an answer. That in itself is bad news.

 

Since when do politicians make any positive contribution ? I had zero expectations – in fact I hoped they would rather say nothing as opposed to making false promises as is their main focus and frankly I don’t care as long as they enforce the law and lower taxes. This was just a plain farewell party for George and that little guy from France..Then again the papers have to have a story right ?
Seriously. BW treaty was in preparation for three years prior to the meeting and the meeting itself lasted for two weeks. Things have been crafted beforehand and it was taken seriously because there was a real need. This time, things have not yet turned bad enough..Why would they with all the zillions printed and given away. The Bankers are not feeling the pinch and never will.

Posted by Franz Kafka | Report as abusive
 

Congratulation to Mr. Kemp naming the problems with their real names since everybody knows that the financial collapse was due to regulators’ faults but they do not admit it.

Posted by Emi Zareva | Report as abusive
 

Brilliant in the argument and fair in the analysis.

Posted by gribskoff | Report as abusive
 

Excellence article written by Mr John Kemp, Congratulations. The main problem lies in the poor & bad leadership of the host President Bush who lacks not only the knowledge subject but also his virtues, wisdom and attitude of play acting smart like a very wise World leader but otherwise is making a fool out of himself is just another smart ass wasting public funds and precious time of the world with his arrogant anti climate policies of global free trade and derregulation without looking at himself and US being stugged in the mud and quick sand economy singking deeper and deeper as day pass-bye. An arrogant rough Texan cowboy that failed US miserably in avoiding to prevent credit crunched and until now failed to see the evil root of the US economic recession and continued to behave indifferently that make him unfit to be a President but a brave warier. With nothing to show in the G20 conferrence and the global leaders mistrust in his shrewd leadership cannot agree with his anti climate and conflicting policies which had been outrightly rejected by the American in the recent election. He can never see the realities and truth in life but only the mirrage of apparent realities due to his past deeds in the brutal killings of innocent lives in the 2 uncivilised wars that he had ordered Americans to fight in neglecting the vital issues of his own country financial disarray and dragging the country he lead into economic chaos and turmoil. I just cannot imagine what a disgraceful and shameful leadership but yet he still could act as if he is the Best and Most Successful President. But I am sure former President Jimmy Carter could enlighten us better. Only Fools shall fight hatred with hatred but the wiseman could win the hearts of his greatest enemy with loving kindness, mutual respect and common interest. Live and let live.

Posted by Albert Tan Beng Cheow | Report as abusive
 

I am from the netherlands.

And must i say i do not trust the political leaders.

For example the minister of economy said in the second week of september that there would be economic growth in the next year. In october suddenly Icesave bank crashed without any signal, then the Fortis bank, and so on.
So, or he is lying that he did not forsee, or he is not smart enough to see this coming.
Either way, the politicians lie now that they do not have a really plan, or they are not smart enough to make a plan.
They just cannot say that they will be looking for a plan when the economy is falling so fast like this, they just cannot postpone it a few months, no way. Unless a plan is already devised but it only takes that extra economic decay to push the probably unfavorable plan (whatever it is) through the throat of the civilians.

Posted by Jan | Report as abusive
 

“But too many proposals in the document are either irrelevant or reveal a disinclination to challenge the status quo.”

True enough, Mr Kemp. But have you ever been to a G-7, G-8, G-20, IMF, World Bank etc. meeting where this did NOT apply?

Posted by Christian A. | Report as abusive
 

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