The global crisis approaches another major twist in its downward spiral. A key barometer of financial and fiscal pressure – the credit default swap (CDS) spread – has widened sharply for Irish government debt over the past few days; the markets think that the risk of a sovereign default is rising sharply. Immediate action is needed to forestall a dramatic deterioration of growth prospects across Europe and around the world.
The G7 ministers of finance and central bank governors met today in Rome. It was a great opportunity for this group of leading industrial countries to reassert its leadership in the global economy, taking strong preemptive action to prevent a recurrence of the calamitous days and near total financial collapse of September/October 2008.
Instead, all we received officially is a communique that blandly restates what these documents always say: we are opposed to instability and we are working on it, honestly. When an official has nothing to say, he or she talks about “principles” – and this was a pure principles communique (e.g., see their 3rd and 6th paragraphs). Nothing new or even vaguely reassuring.
Unofficially, it appears the situation is even worse. The G7 is signalling a lack of support for various key countries that are in the line of financial market fire. This is irresponsible, short-sighted, and bound to lead us all into great danger.
G7 effectiveness is at a low point. Why? The Europeans are in denial, particularly regarding the way their banks and their broader economic and political elite contributed to the global financial fiasco. The Americans are distracted, to put it mildly, while they search for a policies that make sense. There is a great deal of unproductive finger pointing within the G7.
But the real issue is that no one is yet ready to take on the deeper underlying problem – the political power structure of modern finance. While this structure is a particular problem – and particularly obvious right now – in the US, all industrialized countries today share some version of the same problem. We supersized our banking systems, allowed them to load up on risk that could threaten the macroeconomy, and gave them a mindboggling put option – in other words, the taxpayer is on the hook for a vast amount of downside. Across the industrialized (and coming soon to the industrializing world), the message from bankers is the same: give us the bailout money, or your economy will suffer.
Coming to terms with this reality and doing something about it will take leadership – the skills, popularity, and vision needed to really take on bankers (and preferably, win). That leadership is unlikely to come from Europe, Japan, or Canada. It’s also unlikely to come from the G20 (which is basically the G7 plus large emerging markets), whose next heads of government meeting is on April 2nd.
Everyone and everything, in some sense, waits for the US and for President Obama. How long will it be before he is able to fully and personally take charge of sorting out banking at home – and help those trying to do the same abroad?
If you see any other – even slight – glimmer of hope in this situation, post it as a comment here.