Opinion

The Great Debate

Buck-passing augurs ill for G20 summit

By Paul Taylor
March 10, 2009

Paul Taylor Great DebatePaul Taylor is a Reuters columnist. The opinions expressed are his own

The foreplay to next month’s G20 summit is degenerating into a buck-passing exercise rather than crafting a Grand Bargain to save the world economy and regulate capitalism.

The industrialized powers do not agree on how to arrest the steep slide in output, how to handle collapsing banks, how much market regulation is needed, how to reach a world trade deal and prevent protectionism, or how to redistribute power to emerging nations in exchange for their money.

At this rate, the April 2 London summit — U.S. President Barack Obama’s global economic debut — is highly unlikely to restore confidence.

The United States says other countries must follow its lead and spend more on a fiscal stimulus to boost demand. It is turning a deaf ear to calls for radical financial regulation. Euro zone finance ministers, anxious to preserve the budget discipline that underpins their common currency, are refusing to pile up more debt before their current stimulus efforts have taken effect.

The EU seeks a doubling to $500 billion of the International Monetary Fund’s war chest to bail out countries in trouble, including in eastern Europe, and it wants China, Saudi Arabia, Russia and others to pay most of the tab. Yet there is little sign the Europeans are willing to accept a diminution of their IMF seats and votes to make room for the emerging economies.

Washington and London are resisting pressure from France and Germany for mandatory regulation of all financial markets and institutions, including hedge funds and private equity.

STICKING POINTS

The key trade-offs required involve Germany and China pumping more public money into their economies to boost demand in return for the United States and Britain accepting global rules for regulation of all markets; and the industrialized nations agreeing to yield more power to emerging countries in the IMF, and welcome them into the Financial Stability Forum, in exchange for contributions to bolster the bail-out fund and acceptance of an ambitious world trade liberalization deal.

One of the few items on which there is at least rhetorical agreement is a crackdown on tax havens. This is politically useful to show concern for social justice (and improve revenue collection) at a time when unprecedented amounts of taxpayers’ money are being poured into salvaging banks. But it is hardly the central priority in overcoming the worst financial crisis since the Great Depression.

G20 finance ministers must make substantial progress this week toward a Grand Bargain encompassing a coordinated fiscal stimulus, financial regulation, progress on trade, more money for the IMF and more say for the emerging nations.

Otherwise the London summit may go down in history as a milestone on the descent into depression.

Comments
10 comments so far | RSS Comments RSS

I agree completely with Paul Taylor commentary in the above excellent article. The timidity of German leadership, in particular, should have been singled out by Paul Taylor, since Germany’s Merkel did recently reject the plea from East Europe EU nations for an immediate $241 Billion dollar injection of capital. Apparently, Ms. Merkel does not know of the old American saying “A stitch in time, saves nine!”!

Posted by James | Report as abusive
 

James#

241 Billion dollar injection, puts me as a German taxpayer into a further 35 k Euro Govt bond dept, only GM was there a few days ago, begging for a GM/Opel bailout.

G20/IMF will eventually end up in a Global Currency DEVALUATION

Until it is not clear what the rules are gonna be, lets all watch the USA Print and Print & print and Print a little more oh yes …… and Print

Posted by LastReplay | Report as abusive
 

As you say the, only thing they (these so called world leaders) agree on, is to get rid of those so called tax havens (which in most cases are no more tax havens that places like London, New York and a few others less well known places).These so called tax havens have nothing to do with this financial crisis, as, I suppose, everybody knows… It is pathetic when you come to think about the way this G20 will be set up….All I can say is that these so called Western leaders must really feel guilty about something for them to resort to such lowly tactics.

Posted by rumi | Report as abusive
 

James…Merkel’s decision has nothing to do with timidity. If you reflect on the two economic mentalities of the US and Germany they are poles apart. The US’s worst economic memory was the Great Depression – which was effectively caused by massive deflation.

Germany’s worst memory was the Weimar Republic collapse in the early 1920s which was caused by hyperinflation. This is why America doesn’t care about inflating the dollar – America is far more paranoid about deflation problems. Germany is directly opposite – this country is equally paranoid about hyperinflation.

The other big difference is that German politicians are all fairly scathing about Keynesian and Monetarist economics – and much prefers to follow the tenets of the Austrian School of economics. This is easily noticed in the current fight between Sarkosy – who wants to inflate the Euro – and Merkel who wants to keep the Euro strong.

And your “stitch in time …” parable is a poor one. If Merkel pours money into all the troubled Austrian banks that have lent so heavily to the East European block – it’s likely that the Euro could well collapse.

Perhaps Bill Bonner – from The Daily Reckoning describes it best:

‘Sweden to GM/Saab: Drop Dead!

Finally, a nation with a little backbone…a little integrity…a little good sense.

And guess what, it’s that dreary socialist refrigerator – Sweden. Asked to bailout its GM-owned automaker, Saab, the country’s Prime Minister just said ‘no.’ Good for him…

“Voters did not pick me to buy loss-making car factories,” he explained.’

…And the same applies to bailing out other countries.

Posted by Bill Jencks | Report as abusive
 

The United States has been the main, if not the only, culprit in this meltdown. Europe had the legislation and rules to wiesly regulate its banks, notably the Lamfalussy process for filtering out toxic assets from genuine risk-management-enhancing instruments in the financial innovation process. Unfortunately, the regulators gave in to the apparently irresistible greed of the investment banks that were mesmerized by American go-go, predatory brand of capitalism. Many of us saw it coming at least for the last six years, notably because of the barely-concealed agenda of the movers and shakers of the Project for the New American Century that the costs of the wars being waged by America would be more than fully met by the spoils of war and Americans not on the war front could go on shopping “till they drop dead”. All the while, of course the West used its combied voting power in the Asian Development Bank to block the creation of an Asian Monetary Fund or even Asian Macroeconomic Convergence, forcing the Asians to use the far-less-effective mechanism of the Chiang Mai Initiative and the ASEAN+3 grouping of countries to steer that agenda of Asian monetary cooperation. Meanwhile, a timid ‘reform’ of the IMF ended-up, as usual in such predatory, imperialist-mindset-driven institutions, demanding more discipline o the part of the emerging economy countries by way of instant-accessibility disclosure of economic data, while enabling the West to indulge in more outrageous licentiousness than ever before in its profligate ways of doing business.

Now, a last, one hopes that, on one front at least, that of accommodating emerging countries’ aspirations for meaningful increases in their voting power at the IMF and World Bank and in the effective management and daily running of these institutions, the West will be reasonable. But, indications so far are not encouraging. I have myself gone so sceptical that I put on the count of intimidation to forestall his possible readiness to accommodate emrging countries’ demands, and that agsint the wish of the imperialists, the charges that were laid at the door of IMF Manadging Director Strauss Kahn on his innocent passing relationship with an employee. I also put on the count of intimidation against an ‘over-assertiveness’ by China the US navy vessel/submarne-hunting incident that made news yesterday.

It is sad that even a new administratin has notleant the lesson that over-aggressiveness is bound to boomerang on its initiators.

Somebody stop the mad hurtling direct towards the precipice.

Posted by Mohamd MALLECK | Report as abusive
 

Adding to Mr Malleck’s view, on U S financial house decimation of the credit and investment markets, it is sad to see a country with such a great past, have leaders who are unable to stand up and be counted
in their failure to prevent the unfolding of this horrible mess.

These past leaders the heads of their regulatory bodies, now retired, continue to be in a state of denial, whilst leaving the new leaders and regulatory heads the problems they left behind to solve.

An overhaul of the system would demand fudiciary levels that would curb the huge payouts these investment houses generate and cause their eventual functional demise leading to the major markets of New York and London losing their key international roles. The US and British Govenrments will not allow this to happen.

In the meantime, the taxes of the poor will continue to be used to bail out the self proclaimed financial wizards who are probably today retired with their wealth to their island paradise in the Caribbean.

Posted by denis d'cotta | Report as abusive
 

Mohamd you are right. The repealing of the regulatory framework in the U.S.over the past 30 years is the underlying cause of what I perceive to be a U.S. caused world economic meltdown. If one is going to make the case for a global economy then an international comprehensive regulatory framework for the financial industry is paramount. For all of Obama’s calls for revisiting U.S. financial regulation, I find it inconsistent that Washington would be opposed to the same principal in regards to international finance.

As always, Americans pin their hopes and aspirations on the President. He is not a King and our government is not a monarchy. The current budget is loaded with earmarks despite the campaign rhetoric of the President. McCain was all but ignored by the Senate when he spoke out against the practice this week. I would submit that if our government presents inconsistent policies and action that a mixed signal is being sent by the voting public to elected representatives.

I do not support globalization. It has probably seen it’s day in the Sun. However the historians are correct. restricted world trade worsened the Great Depression. The U.S. has always cried we do not have a level playing field in world markets. We have an opportunity to build the first block of such a world by coming to an agreement with other nations on international financial regulation. Or maybe we just don’t know what we want?

Posted by Anubis | Report as abusive
 

I just wondering if EU, or Japan has so great financial systems why they suffer from USD problems. I guess capital must rush into EU & JPY from bad USD. EU 7 JPY must go up agaisnt USD. Oppps… EU & JPY are sinking against USD for last 12 mo.

The reason is right here. US gov hits every button to save USD and everybody who still hold USD.

Example: US saves bankrupt AIG and allows AIG to use gov money to honor foreign obligations. While Germany don’t want to help even other govs in EU zone.

Unfortunately there is nothing better than USD.

Yep. USD has biiiiig room for improvement.

Financial wise EU zone much worse that USD check expose to toxic papers (check East Europe bonds) and corp/gov debt level corpare to GDP.

Regulations…
If regulation from 30 yrs ago would be in place you live in US with very few private houses, Few credit cards, few new cars. In 1970′s mortgage rates were in 12-20%….

Unfortunately rules follow the greed that drives financial innovations.

That what I ran into:
1. US will keep mark-to-market rule (Do not let banks to assign out-of-the-blue prices to dead/non-liquid assets)
2. reinstall short trading rules
3. CDS notional must not exceed notional of underling bond.
4. CMO/CDO tranches should not mixed bonds of different credit rating (Don’t let add A+++ to make C tranch look like B).

But it is so hard to regulate greed.
======================
Developing World.
West seams to be responsible for people who hates West.

I saw industrial revolution in Asia sparked by open US/European markets. I saw jobs flow away from these country. I saw US become financial hub rather than industrial base. I see education/technology/innovations also driven away.
I know, Africa kind left behind. But it is really not own fault. Since many countries didn’t miss their chance: China/S.Korea/India/Mexico etc.
Why you (since I am not from US :) let corporations reside in US (safe, rule of law, stable finance) while they keep all infrastructure oversees?
I just don’t get it.

May be Muhamed will help me :) .

I see why US need open trade agreements with EU/Canada/Japan/S.Korea. They are on the same page.
But when we talk China/India/Brazil/Mexico etc…
Sorry. They go through industrial revolutions. Chk history!!! Farmers driven to urban areas by advances in agriculture. They are ready to work for food. West life expectancy comes to 75-80 yrs their 55-65 yrs. Their govs don’t waste money on social programs or benefits. Corporation love it. But why we let West corporations to move infrastructure to such places?

For the rest Developing World. Don;t blame west or west institutions for own problems. Take a seat and watch show: Great Satan die of own greed. Do they need money to buy a ticket?

Posted by SKV | Report as abusive
 

G-20 may be turned out to be G-2 for Sino-American Economics. Visit http://www.Google.com and read blogs apropos on Sino-American economics. March 14, 2009

Read Washington Post,March 6 2009 issue re G-2 online.

 

Unfortunately Paul Taylor is probably correct in his assessment that the divisions among G20 members will lead to more show than substance at the London G20 meeting.

One of the tragic short comings of Western G20 members is their refusal to acknowledge how the balance of economic power is shifting from West to East. We want Asian nations to contribute more money to the IMF but don’t want to give them more representation with important leadership positions at G20, IMF or anyplace else.

In order to receive more cooperation from Asian nations the West will have to reconcile the present dominance of the West within G20 and elsewhere. If each nation acts only in its own self interest financial conditions could deteorate very fast indeed.

 

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