– Paul Blustein is a journalist-in-residence at the Brookings Institution. He is writing a book on the World Trade Organization, which will be published in September. The views expressed are his own. —

Telling young people to abstain from sex is “not realistic at all” — new mother Bristol Palin, 18.

The wisdom of Ms. Palin should be borne in mind by the leaders of the Group of 20 nations at their April 2 summit when they turn to trade.

The meeting comes at a time when worries about protectionism are mounting, because a number of countries have raised trade barriers and enacted other quasi-protectionist measures.

It is tempting to say, as many commentators have, that the G20 should vow to shun all new acts of protectionism, including any tariff-raising or more subtle actions such as “buy local” provisions in government stimulus programs. Unfortunately, such blanket pledges will be no more credible than teenage abstinence campaigns. The G20 must be ambitious on trade, but it must also be practical. Minimizing long-term damage to the trading system should be the overarching goal.

The G20’s effort on trade at its first summit last November was loaded with high-mindedness—and, as it turned out, hot air. The leaders said they would “strive to reach agreement” in 2008 in the World Trade Organization’s Doha Round of trade negotiations, which have dragged on for seven years. And they promised to “refrain from raising new barriers” for 12 months.

Alas, violations of both the spirit and letter of the declaration materialized within days of its promulgation.

An effort to convene a meeting to advance the Doha talks fell apart. Meanwhile, Russia raised duties on cars, pork and poultry; India raised tariffs on steel products; Indonesia imposed onerous customs requirements on certain imports. The U.S. Congress included a “Buy American” provision in its economic stimulus package, and Washington has started to bail out the U.S. auto industry, which helps domestic firms at the expense of foreign ones. Other nations are following suit.

As a result, proposals abound for the G20 to approve not only a “standstill” on all tariff hikes but a ban on buy-local preferences and subsidies that favor national producers. Also widespread are exhortations for the G20 to take a “just do it” stance on the Doha Round.

Desirable though it would be to see such an approach endorsed and implemented, the G20 needs to guard against another blow to its credibility. Let’s face some lamentable facts: Auto industries are going to be bailed out, and in an discriminatory fashion. (Congress simply isn’t going to grant loans to Toyota, even though Toyota has large plants in the U.S.) Anti-dumping cases are going to soar. More righteous verbiage from heads of state will do nothing to close gaps in the Doha talks.

So the principles guiding the G20 should be these: Make sure that the rules-based trading system survives. Don’t try now to open markets further; rather, focus on keeping protectionism, and quasi-protectionism, from becoming long-lasting features of the international economy, so that globalized trade can help the world recover and prosper anew. To the extent that anti-market policies are adopted, keep them temporary and limited in scope.

This means first of all shoring up the WTO, which is the ultimate guardian of open markets. The WTO keeps a lid on tariffs of its 153 member countries and adjudicates trade disputes that might otherwise flare into trade wars.

Specifically, the G20 should recast the Doha talks as an emergency anti-protectionism round. The partial deal that is currently on the table, though not at all far-reaching, would lower the legal caps on tariffs that many countries can impose. Adopting a package like that, while postponing action on other, more contentious issues, would help toward insuring against protectionism in the years ahead.

– James Saft is a Reuters columnist. The opinions expressed are his own –

The dollar is, and will remain, the U.S.’s currency and its own and everyone else’s problem.

The idea of creating a global currency, as espoused by China earlier this week, is interesting, has a certain amount of merit and is simply not going to happen any time soon.

U.S. desire for free access to the cookie jar that being the world’s reserve currency represents will be too strong, especially given its need to finance huge amounts of debt reasonably cheaply. As well practicalities are fearsome, even if consensus was more or less there.

Chinese central bank head Zhou Xiaochuan on Monday called for the creation of a new “super-sovereign” global reserve currency, advocating building on an International Monetary Fund instrument called Special Drawing Rights.

Zhou echoed a call by Russia last week, when it indicated it would raise the issue at the upcoming Group of 20 meeting in London on April 2, saying the idea had support from emerging market economies including Brazil, India, South Korea and South Africa.

There is no doubt that the current system breeds instability, but it enjoys the great advantage of entrenchment and sticking with it allows the U.S., and others, to avoid making hard choices and paying true market prices for their economic decisions.

No surprise then that President Obama knocked the idea down in blunt terms. “I don’t believe that there’s a need for a global currency,” Obama said, terming the dollar “extraordinarily strong right now.”

Exactly. Too strong by some margin, especially when one considers the coming effects of both quantitative easing and a massive long-term need to fund the costs of the debt binge that exploded and the ever increasing bailout to clean up the aftermath.

In fact you could say the dollar’s “extraordinary” strength can only be fully explained when you take into account the fact that foreign central banks keep piling up huge reserves of the thing and that it is the international medium of exchange for commodities and energy, well really for global trade and financial intermediation.

Treasury Secretary Timothy Geithner said on Wednesday the U.S. dollar is still the world’s reserve currency and will remain so for a long time, but expressed openness to greater use of IMF SDRs.

The dollar’s central role has two main implications, both rather ugly but also very seductive for those involved.

For the U.S. it’s a bit of a free ride as far as debt financing goes. People buy and hold treasuries more and the U.S. gets cheaper financing that would otherwise be the case. Of course that’s a bit like an alcoholic bartender getting a discount at work; a real benefit, but not a true one.

It also means that even if the U.S. has the will to take away the proverbial punchbowl or drive the dollar down, it doesn’t always have control, as what it does at the short end of the interest rate curve can be confounded by foreign purchases that keep the long end and financing costs down and the dollar up.

SOVEREIGN OVER US ALL?

The U.S. reserve status also opens up the opportunity for mercantilist countries, like, say China, to keep its own currency cheap, building up huge dollar stocks and force-feeding the American milch cow with cheap credit with which to buy imported goods.

That may not work any more anyway, as all of the cow’s stomachs are full and the milk’s gone thin.
There is a temptation also to build up reserves as protection against bad times and bitter IMF medicine.

Many Asian leaders seem to have vowed after 1997 that they would do what was needed, which often included building up dollar reserves, to avoid having to meet an IMF director’s plane at the airport and accept the accompanying prescription.

That rather indicates that the old system, with the U.S. as global reserve currency, is dying, but I doubt it will do so without a fight and with cooperation among nations willing to cede part of their sovereignty, even for a greater good.

It is amazing and encouraging that China speaks of ceding control of a portion of its foreign reserve assets to IMF management, but I have a hard time seeing it happening widely soon.

So, we will have to get through the next year or two without a super-sovereign currency and with global imbalances being worked out, or around, under the current system.

My best guess is that things actually go in the right direction, more or less. The dollar should weaken as a result of U.S. policy even without a deliberate push downhill from the Chinese. Asian exporting nations will see slowing reserve growth generally, which should translate into diminished flows into the dollar and Treasuries.

That’s going to be painful all around. The Chinese and others will see their investments dwindle, even as they have to resist the impulse to sell into the fall. For the U.S. the process of implementing monetary policy and paying for fiscal policy will be made that much more difficult.

So, goodbye and perhaps good riddance to dollar hegemony, but don’t expect a stable system of global cooperation to rise easily and quickly in its place.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –

– John Kemp is a Reuters columnist.  The views expressed are his own –

UK Prime Minister Gordon Brown’s call today for a new G20 charter of principles on financial regulation  reflects an emerging consensus among policymakers that, once the immediate crisis has passed, the regulatory framework must be fundamentally redesigned.

In particular, policymakers are concerned with how to correct the basic moral hazard problem in which bankers have an incentive to extend too much credit, while private firms and households have an incentive to take on too much debt.

A consensus is emerging that the volume of credit expansion needs to be restrained and managed as a separate policy objective. This marks a sharp break with past practice — in which central banks attempted to control the cost of credit by manipulating short-term interest rates, but have increasingly left its quantity to decisions by individual banks and borrowers.

There is also something of an emerging agreement that if credit control is a separate economic objective alongside “internal balance” (output-inflation) and “external balance” (trade and capital flows) then a new instrument needs to be developed to achieve this target.

With three targets (internal balance, external balance and financial balance) Tinbergen’s Rule says there need to be three independent policy instruments — fiscal policy, monetary policy, and a distinct credit policy.

In his recent speech to the CBI Annual Dinner in the East Midlands last week, Bank of England Governor Mervyn King alluded to the need to develop a new policy instrument to achieve credit-policy objectives. He stated a strong preference it should not be interest rates. King argued rates should continue to be used to target output and inflation.

The clear implication is the “new policy instrument” referred to by King will have to be some form of direct quantitative control, so as not to interfere with interest-rate strategy, and allow the authorities to manipulate the volume of credit for any given level of interest rates.

SECOND GENERATION CONTROLS
In 1945-1975, banking crises were few, but credit was expensive and unavailable to many households and businesses. The banking system was tightly controlled and the quantity of credit was rationed through a variety of direct mechanisms (reserve requirements, intensive bank examinations, margin requirements and a host of other direct lending controls).

Most of these were dismantled during the 1980s and 1990s. They could be resurrected but this would face stiff opposition from within the industry. It would also face hostility from within the economics establishment (broadly in favour of market solutions) and among politicians (worried about the impact of reduced access to credit for many households, and voters, in the lower half of the income distribution).

Fed Vice-Chairman Don Kohn and Prof Lawrence Summers (now head of the Obama administration’s National Economic Council) both poured scorn on what they saw as a rose-tinted view of the heavy regulatory past at the Fed’s annual Jackson Hole symposium in 2005. Both men are presumably chastened by the subsequent meltdown. But their personal opposition to intensive quantitative controls is probably still intact, and shared by many policymakers at the top of the new administration, in Congress, and among the wider regulatory community.

So the search is on for a compromise. The idea is to create a new instrument or instruments that would work with the grain of the market, rather than cut against it, and enable regulators to exercise some control over the quantity of credit being extended while preserving flexibility for banks to innovate.

If the old pre-1980 quantitative controls are seen as “first generation” methods, the hunt is on for more sophisticated market-friendly “second generation” methods that promote stability while protecting growth.

The first design issue for these new quantitative controls is whether to impose them directly or indirectly.

First-generation quantitative controls were formulated within the central bank and consisted of a series of prescriptive lending ratios.

The trend in recent years has been towards a more indirect approach, in which the central bank and other regulators set out general principles and a flexible framework; banks are then free to manage their business and risk-taking within this. One key question is how far second-generation controls will build on the modern principles-based indirect approach, or revert to a more prescriptive command-and-control one.

COUNTER-CYCLICAL INSTRUMENTS
The second design issue is how to make quantitative controls “active” rather than “passive”. First-generation controls were largely specified in passive terms: fixed capital and lending ratios that were invariant over the cycle. But there is an emerging consensus second-generation controls should be more active and capable of varying over the cycle, limiting credit growth during the expansion phase, but also mitigating the collapse of credit during a contraction.

Contra-cyclical bank regulation policies are especially popular at the moment, because the industry is in the contraction phase, and contra-cyclicality implies a loosening of policy. The real challenge is to create a contra-cyclical approach that is sufficiently robust it can compel the banks to increase their capital cushions during an upturn.

One option is to impose reserve requirements or risk-weightings which rise above the long-term mean during expansions and are allowed to fall below it during the contraction phase. But that raises thorny questions of who measures the cycle and how. Dating and measuring business and credit cycles, and identifying turning points are notoriously difficult in real time.

To take a recent example: the start of the most recent expansion is controversial, with many commentators now arguing the Fed missed the beginning of the upturn and failed to raise interest rates in a timely manner. If the Fed, or another regulator, had been responsible for adjusting reserve requirements or risk-weightings, as well as interest rates, would the adjustments have been any more successful?

If relying on regulators’ discretion to identify turning points in the credit cycle is problematic, is there a way to make contra-cyclical controls endogenous to the lending system?

The aim would be to make reserve requirements, risk-weightings or other instruments depend on the volume of credit extended in the immediate past period(s). Credit controls would be progressively tightened the longer and faster credit expands, and progressively loosened the longer and further credit falls.

The problem with endogenous credit control policies (like endogenous interest rate policies) is that they do not work well around cyclical turning points.  In the summer of 2007, an endogenous contra-cyclical policy would probably still be tightening conditions in response to the explosive credit growth in 2004-H12007 rather than loosening them to forestall the calamitous collapse of credit that occurred later in the year.

INSTITUTIONAL REACH
In practice, credit is hard to define, measure and restrict. Conventional bank lending is only one element of an increasingly complex and diverse credit-creating system.

Finance companies, commodity brokers, special investment vehicles, and even hedge funds, all of which are increasingly active in wholesale money markets, may be engaging in credit-creating processes.

The question of what types of credit to control is analogous to the debate during the 1980s about what measure of the money supply to target. Moreover, Goodhart’s Law suggests any statistical or economic relationship between the chosen target measure and the wider economy will tend to break down once pressure is applied for control purposes.

In fact, as soon as the authorities decide on which forms of credit are subject to regulation and control, there is an immediate incentive to create other forms of credit in other institutions that are not subject to control and therefore more profitable. This was precisely the reason for the huge growth in the “shadow banking system” during the 1990s and 2000s.

To have any chance of being effective, the new credit policy will need to cover the whole range of institutions which create credit, not just commercial banks, and need to be applied on a fairly international basis, to prevent this sort of institutional and jurisdictional arbitrage.

–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.

George Magnus is Senior Economic Adviser, UBS Investment Bank, and author of “The Age of Aging: How Demographics Are Changing The Global Economy And Our World”. Any opinions expressed are his own.

The election of Barack Obama as president of the United States has unleashed a welcome torrent of optimism during hard times. Aside from an especially demanding domestic policy agenda, the new president will also have his work cut out to rebuild the authority of and respect for U.S. leadership in the global community.

The G20 meeting in Washington on November 14-15, billed as the forum for rebuilding the world’s financial architecture, could not be happening at a more important time. We should be under no illusion, however, that results will occur in a week, despite the expectations. Anyway, the G20 has the more pressing issue of countering global financial instability and the global recession.

Nevertheless we – or they - need to think big and hope that new thinking from the Obama administration will be channeled precisely in the direction of global monetary reform. Part of the reason for the banking crisis, and its awful aftermath, was the untreated chaos in the global monetary system. Essentially, it was this chaos that contributed to exchange rate misalignment, the existence of unsustainably large external imbalances, and the creation of a debt mountain in advanced nations and excess savings in poorer nations.

If we are to stabilize the global economy in the longer term and be confident that periodic fires can be fought without risk of systemic failure, these issues need to be tackled now, and they can only be done so via a system of rules to which all participants can subscribe.

Although the return to financial stability and sustainable economic growth will dominate the G20 agenda, this forum may also be the appropriate one to review and implement initiatives related to other big and long-lasting changes in the world, such as demographic change and rapid aging.

Rich countries, which are now experiencing the onset of rapid aging, need to secure a high level of economic co-operation in trade, capital and exchange rate arrangements so that they can derive the economic benefits of globalization. These benefits will be important to help generate the income and resource transfer from a working-age population that is growing slowly to a rapidly expanding population of economically inactive over 60s.

In a more protectionist and nationalistic world, by contrast, stagnation beckons along with a rising incidence of poverty and unrest because of poor employment and income prospects.

Developing nations, which won’t experience the material consequences of aging for another 30 years, also need such co-operation. They need to adjust from being export machines to more balanced, sophisticated economies that meet the employment, education and prosperity aspirations of their growing, working-age populations.

If they fail, they could be faced with economic and political instability. In that event, they might well fail to fulfill the leadership role given by their economic potential

We have an opportunity to improve the way globalization works and spread the benefits through strengthened institutions. The G20 meeting, and hopefully the infectious optimism of the Obama administration, can be the start of such a process.

(Pictured above: Brazil’s President Luiz Inacio Lula da Silva (R) and Britain’s Prime Minister Gordon Brown begin a bilateral meeting, in advance of the Summit on Financial Markets and the World Economy, in Washington, November 14, 2008. REUTERS/Mike Theiler)

World leaders vowed to work together in overhauling the global financial system as they headed to Washington for a summit on wresting the global economy from recession and avoiding future meltdowns.

Far from the confines of Washington, Reuters readers launched into a lively debate, sparked by Reuters columnists and experts, on what this means for the global financial crisis.

One of the more lively discussions arose from a column theorizing the financial crisis is the greatest threat to international security. Paul Rogers, Professor of Peace Studies at Bradford University and Global Security Consultant to Oxford Research Group argues:

Unless global responses are made to the current economic crisis, the biggest threat to international security will be the impoverishment of hundreds of millions of people, leading to radical and violent social movements that will be met with force, resulting in still greater conflict.

Reader Jonathan Cole contends:

When the “me” impulse overcomes the “we” impulse to the point that it creates a dysfunctional, unjust concentration of wealth and comfort in the hands of a minority, while consigning the rest to poverty, bad health, and early death, it is only a matter of time before the anger bubbles up from the masses.

Reader James Harris counters:

Maybe it is time for better thinking and not these emotional reactions, that are ultimately an innate desire for finger pointing at U.S. Leadership in causing the financial crisis.

While reader Michael Anderson comments:

I think it would be very beneficial if we had leadership which could promote a mindset whereby we didn’t think of it as us versus them. When underdeveloped nations begin sharing in the wealth to a larger degree we all win.

“Move over America! Make space Europe!”

Reuters columnist Paul Taylor writes that this summit of 20 nations sets a precedent for a new international order. Emerging economies such as China, India, Brazil, South Africa and Mexico are invited to share responsibility for the economic fate of the planet with the established Group of Eight industrialized nations.

No longer mere appendages invited for lunch at the end of the annual G8 summit, the rising powers are in demand because they have either mountains of cash, vital natural resources, fast-growing economies or regional security responsibilities.

Reader RC comments:

India constitutes around 17% of the world population whereas the whole of Europe constitutes only around 5% of the world population. Europe have 3 permanent UN security council members with veto power, which India does not have. What kind of democratic world is this?

“Risk-taking is the engine of economic innovation”

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor puts forth the argument that the U.S. won’t stomach a new Bretton Woods. She writes:

Whatever the wisdom of more far-reaching international financial regulations, many Americans don’t want binding rules administered by a bureaucracy unaccountable to the public. They prefer to do the job themselves. They want sovereignty over their own affairs, and are suspicious of international organizations.

What are your thoughts on the issues world leaders face as they tackle the financial crisis?

— Diana Furchtgott-Roth,former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed are her own. —

Leaders of the Group of 20 countries meeting in Washington on Nov. 15 are hoping that America’s role in the global financial crisis will shame President George W. Bush, or maybe President-elect Barack Obama, into supporting greater international financial regulation, diminishing America’s role in international financial institutions.

But America is unlikely to give up control over its financial sector, certainly not under Bush, and probably not even under the internationally-popular Obama.

International leaders demand a replay of the 1944 wartime conference at Bretton Woods, New Hampshire, at which delegates from 44 nations created the World Bank and the International Monetary Fund. The World Bank made loans to war-torn countries and now lends to developing countries. The IMF supervised fixed exchange rates centered on the U.S. dollar and gold, a regime abandoned in the 1970s, and made rescue loans to troubled economies, a role that continues.

When European Union leaders met in Brussels on Nov. 7 to prepare for the financial summit, they proposed a course that might be as far-reaching as Bretton Woods.

An EU statement, sweeping but vague, proposed that financial institutions of “systemic importance” be made subject “to rules or at least to oversight wherever they operate” and that “no market segment, no territory, and no financial institution should escape.” That proposition is a dangerously empty vessel into which all manner of regulatory mischief could be poured.

Such international regulation would be unprecedented.

British Prime Minister Gordon Brown and French President Nicholas Sarkozy, now the EU president, want the IMF to enforce the new regime, building up an institution traditionally headed by a European. Standards would be promulgated and enforced by the IMF, similar to the way that the European Commission enforces rules among EU member states.

Their goal is to offer principles for a new international financial system that would be translated into workday regulations for all manner of financial institutions, even ratings agencies. Ambitiously, the Europeans want another summit in 100 days to consider draft regulations.

But it’s unlikely that Congress or any American president, Bush or Obama, would sign on.

Whatever the wisdom of more far-reaching international financial regulations, many Americans don’t want binding rules administered by a bureaucracy unaccountable to the public. They prefer to do the job themselves. They want sovereignty over their own affairs, and are suspicious of international organizations.

Americans’ distrust of international regulation stems from international organizations that are perceived to be anti-American. For example, the United Nations Oil for Food program, intended to allow food to reach hungry Iraqis, wound up profiting Saddam Hussein’s family and political supporters, leaving southern Shiites to starve.

Congress gains power by regulating the financial sector because companies donate campaign funds to members. The securities and investment industry, which stands to lose the most from international regulation, is particularly generous.

The Center for Responsive Politics reports that securities and investment houses donated over $1 million to Senator Chris Dodd, now Senate Banking Committee chairman, and over $540,000 to Alabama Republican Richard Shelby, then-chairman of the Senate Banking Committee, in 2004, the year they last ran for reelection.

Obama received $13 million from the industry for his presidential campaign, and Senator John McCain $8 million.

The fundamental question is whether more international financial regulation can resolve the current crisis and prevent another one– without hindering innovation. Since risk-taking is the engine of economic innovation, we don’t want to stifle it by regulation and all financial innovations will carry some new risks.

The huge crowds that cheered Obama in Europe last summer will not persuade him to cede control over his country’s financial system to the IMF. The most that the G20 can hope for under the new president is that Congress adopts its new principles and America regulates itself.

Diana Furchtgott-Roth can be reached at dfr@hudson.org.

– Do you want to contribute to The Great Debate? Please send your ideas to debate@thomsonreuters.com.–

Paul Rogers is Professor of Peace Studies at Bradford University and Global Security Consultant to Oxford Research Group. Any views expressed are his own.

Unless global responses are made to the current economic crisis, the biggest threat to international security will be the impoverishment of hundreds of millions of people, leading to radical and violent social movements that will be met with force, resulting in still greater conflict.

Oxford Research Group’s 2008 International Security Report, The Tipping Point?, published on 13 November, points to some improvements in security in Iraq in the past year as well as the potential for major changes in US policy in South West Asia with an incoming Obama administration.  It also finds that the recent deterioration in East West relations after the Russian intervention in Georgia in August can be reversed, but its main conclusion is that it is the global financial crisis that is now the most dangerous threat to international security.

With the G20 meeting due in Washington on 15 November, all the indications are that the response to the crisis of the most powerful states will be to focus narrowly on immediate issues, with calls for improvements in international financial cooperation involving:

•    An effective early warning system.

•    A more effective framework for transnational responses.

•    An independent “college of supervisors” to provide systematic monitoring of the world’s major companies and financial institutions.

These may well be useful responses to the immediate crisis but they have little or no relevance to the wider global predicament.  Instead, the opportunity should be taken to introduce fundamental economic reforms which reverse the wealth-poverty divisions that have got so much worse in the past three decades.

Most of the benefits of these decades of economic growth have been concentrated in the hands of a trans-global elite community of about 1.2 billion people, mainly in the countries of the Atlantic community and the West Pacific, but with elite communities in the tens of millions in countries such as China, India and Brazil.   At the same time, improvements in education, literacy and communications in recent decades have increased the awareness of many marginalised people of this unjust distribution of wealth.

On present trends many hundreds of millions of people among the poorest communities across the world will suffer most.  This is likely to lead to the rise of radical and violent social movements, which will be controlled by force, further increasing the violence.   The intensifying Naxalite rebellion in India and the substantial problems of social unrest in China are early indicators.  Responding to the crisis in a manner which places emphasis on improving emancipation and reversing the widening of the global socio-economic divide is therefore the most important task for the next twelve months.

Trade reform aimed at improving the economies of third world states, coupled with debt cancellation and substantial aid for sustainable development are all required as a matter of urgency if we are to avoid a much more divided global system in which the majority of the world’s population is marginalised, and increasingly resentful and bitter.

We can either respond as a global community or as a narrow group of rich and powerful countries.  The choice we make in the next few months will do much decide whether the world becomes more or less peaceful over the next ten years.

– Paul Taylor is a Reuters columnist, the views expressed are his own –

LONDON (Reuters) - Move over America! Make space Europe! The world’s top leadership table is expanding to bring in emerging powers from Asia, Africa and Latin America to help rescue the global economy.

This week’s Washington summit of 20 nations, called to discuss reforming the international financial system and avert a further worsening of the credit crisis that began in the United States, sets a precedent for a new international order.

Emerging economies such as China, India, Brazil, South Africa and Mexico are invited to share responsibility for the economic fate of the planet with the established Group of Eight industrialized nations — the United States, Japan, Germany, Britain, France, Italy, Canada and Russia.

Saudi Arabia is urged to disgorge its petrodollars and China to tap its $1.9 trillion reserves to underwrite rescue packages and buttress a Western-dominated financial system the collapse of which would wreak even worse devastation around the world.

No longer mere appendages invited for lunch at the end of the annual G8 summit, the rising powers are in demand because they have either mountains of cash, vital natural resources, fast-growing economies or regional security responsibilities.

Will they cooperate, and what do they want in exchange?

“A voice is the most important thing,” said a former senior U.S. financial policymaker, who spoke on condition of anonymity.

“As they look out at global economic prospects, they will also want to see that their money is going to be safe. They will want to see a plan that gives them confidence,” he said.

Beyond that, some of the key holders of dollars and oil may seek security guarantees and assurances that the West will not discriminate against investments by their sovereign wealth funds or their exports during the coming recession.

In a joint statement, the so-called BRIC countries — Brazil, Russia, India and China — called last week for “reform of multilateral institutions in order that they reflect the structural changes in the world economy and the increasingly central role that emerging markets now play”. They also sought assurances against protectionism in the financial crisis.

INTERESTS AT STAKE

Here are some of the interests at stake for key players:

CHINA - The world’s most populous nation, a nuclear power and member of the U.N. Security Council, still regards itself as a developing country. Its communist rulers have just announced a huge domestic stimulus package of public investment but they are deeply cautious about opening up further to the world economy.

Chinese investment has not always been welcome in the United States, where many in Congress accuse Beijing of keeping its currency artificially cheap and want to curb imports from China.
Beijing has said nothing about its terms for helping bail out the capitalist West, but it is likely to want a bigger voice in global economic governance and some guarantees against protectionist steps by Washington and Brussels.

It may also want to ease Western pressure on it to curb greenhouse gas emissions in the fight against global warming.

INDIA - The world’s second most populous country has long sought a larger role in global leadership and sees itself as a spokesman for the developing world.

Prime Minister Manmohan Singh has called for reform of the United Nations Security Council and the G8, implicitly to give India a permanent seat in both.

“Our voice on how to manage this crisis in a way that does not jeopardize our development priorities needs to be heard in international councils,” he told a summit with fellow emerging powers Brazil and South Africa last month.

India seeks both assurances against Western protectionism and the right to continue protecting its subsistence farmers. It too wants to deflect Western pressure to curb emissions which it says would deny its right to economic development.

SAUDI ARABIA - The world’s biggest oil exporter is the only Middle Eastern state in the G20, frustrating Egypt, which lacks resources but sees itself as the leader of the Arab world.
Arab specialists say Riyadh seeks above all U.S. protection against Iran’s growing regional power and nuclear ambitions and from the ascendancy of Shi’ite Muslims in Iraq, which it fears will embolden Shi’ite minorities around the Gulf.

It also wants the next U.S. administration to take up an Arab League plan for peace with Israel and pressure the Jewish state to reach accommodations with Syria and the Palestinians and to stop discrimination against Arab investments, such as the blocking of Dubai Ports World’s purchase of six U.S. ports.

The Saudi monarchy also wants an end to what it regards as destabilizing U.S. pressure for democracy in the Middle East.

INCUMBENT POWERS UNEASY

The first-ever G20 leaders summit, for which the European Union has made all the running, comes in the lame-duck period when President George W. Bush is preparing to hand over to President- elect Barack Obama, putting Washington on the defensive.

“It is outrageous that the Europeans would take advantage of the moment of maximum U.S. weakness to call such a meeting,” the former U.S. financial policymaker said.

The G20 was created in 1999 but until now has been limited to broad-brush discussions among finance and monetary officials.

The world’s only superpower prefers bilateral financial diplomacy, in which it has the upper hand, and tried-and-tested smaller formats such as the G7 grouping of finance ministers and central bankers, which does not include Russia.

Washington is trying to deflect a battery of ideas from hyper-active French President Nicolas Sarkozy for supranational regulation or supervision of financial markets, hedge funds, private equity, mortgage lenders and sovereign wealth funds.

The EU has led pressure to expand the G8 to incorporate the emerging nations, whose cooperation the Europeans see as vital not only to help restore financial stability but also on issues such as trade liberalization and fighting climate change.

Despite anomalies in its make-up, such as the inclusion of Argentina, the G20 summit is well placed to become a key forum on financial reform because it already exists, and there are plans to hold a series of such meetings.

This might prove more practical than British Prime Minister Gordon Brown’s proposal for a sweeping review of the post-World War Two financial order, known as Bretton Woods.

But the G20 may be too unwieldy to be effective, and smaller leadership forums seem bound to emerge. One favorite is a G13 or G14 — a forum that would expand the G8 to include China, India, Brazil, Mexico and South Africa. Some see an Arab or Muslim member, either Egypt or Saudi Arabia, as essential.

Spain, Europe’s fifth largest economy and the world’s ninth but not a G20 member, announced at the weekend that it had won a last-minute invitation to the summit.

However many policymakers, both in the United States and in the developing world, see the over-representation of Europe at the world’s top tables as part of the problem.

The Europeans only reluctantly yielded a little of their voting powers to China in the International Monetary Fund this year. The big EU member states remain unwilling to pool their seats into a single EU delegation in global institutions, with the notable exception of the World Trade Organization.

But a further redistribution of European and U.S. votes at the IMF and some consolidation of Europe’s seats at the world’s top tables may be the price to pay for the emerging world’s help in resolving this financial crisis.

(Pictured above: Brazil’s Finance Minister Guido Mantega, South Africa’s Finance Minister Trevor Manuel (R) and British Treasury Financial Secretary Stephen Timms (L) attend a news conference in Sao Paulo November 9, 2008.)