Initial reactions to the G20 summit are fairly positive, in the sense that the communique and associated press conferences conveyed (a) there was no open acrimony, (b) the body language was broadly supportive of countercyclical policies, and (c) there may now be a serious international regulatory agenda.
None of this is really new and it could all have been arranged by finance ministers (probably over the telephone), but I agree there is some useful symbolism in having heads of industrialized and emerging market governments convene for the first time (ever?) on these kind of issues.
I will admit to disappointment that no more explicit commitments were made to fiscal stimulus. I thought the British and the French were heading in this direction, and that they could create some momentum in the right direction. If Europeans (or anyone else) would like to compete for a “special relationship” with the US after January 20th, they might consider coming to the next summit with substantial fiscal package in hand (as will President Obama).
If the latest rounds of global economic diplomacy were the Olympics, then China gets gold in the fiscal stimulus category, Germany gets silver, and the UK (so far) is the distant bronze – but the UK does get one more throw next week. Not the ordering of world economic leadership that one would ordinarily expect, but perhaps that’s a good thing.
In the category of “largest cash contribution designed to save the world from serious disruption”, Japan easily finishes first – their $100bn pledge to the IMF this week was timely, targeted and hopefully not temporary. Sadly, there were no other entrants in this category. Perhaps the chemistry and cooking at the White House dinner on Friday will prompt further contributions in the near future?
But there is, unfortunately, another way to read the communique – as a government or international official, for whom this text really is a set of instructions to be implemented. The whole first part of the document is generic and definitely not new, so – as an official – one’s eye skips through that quickly. The real issue is the deliverables in the plan of action, with a pressing deadline at the end of March (this is pretty much like saying “do it tomorrow” to an official). This is where we – an official reader is thinking – must concentrate our immediate attention and efforts. And most of these specific actions are about tightening regulation on and around credit, or beginning processes that definitely point towards many dimensions for this kind of tightening – accounting standards, hedge funds, risk disclosures, financial sector assessments, credit rating agencies, risk management and stress testing models, international standard setters, sanctions for misconduct, reporting to supervisors in different countries, and more.
There is, of course, nothing wrong with making regulation more effective. This is surely needed – in both the US and Europe, and probably elsewhere – to help lower the odds of another global financial crisis developing in the future.
But we are still not out of this crisis. And tightening regulations quickly in the midst of a worldwide credit crunch is one good way to make sure that credit contracts further and faster. Lending standards naturally tighten in a crisis; the issue to address going forward is how to prevent standards from loosening too much in the next boom – but this is at least several years down the road. I’m in favor of starting early, but I do not like precipitate action just because you want to look busy and you could not agree on the more pressing issues, such as fiscal policy, support for the IMF, shoring up the eurozone, and so on.
It is true that one (among many) of the stated principles is: “Mitigating against pro-cyclicality in regulatory policy.” But that is a general statement that is not mapped into operational requirements – except that the IMF and FSF should work together on this, which is a good way to make sure it doesn’t happen. What officials have to deliver on, by the end of March, is substantive progress with regards to tougher and tighter regulation of credit. There is a real danger that this action plan – within such a short time frame – can actually make the global downturn dramatically worse.
The Baseline Scenario 
I read through it, and it seemed to be simply a statement of the kind of world we’d like to live in. There didn’t seem to be anything to argue with, because there weren’t any specifics. What was the point? Why not just say we’ll try and do things better in the future?
Still I could not understand the outcome of this meeting. Apart from promises ( Regulations) what they are going to do tomorrow to resolve this crisis. Can some one explain me in few lines in lay mans words?
From 30,000 feet, it looks like these regulatory measures are specifically meant to satisfy Europe. Hopefully, this statement or the symbolic gestures that follow it (without requiring implementation of tight regulations in the midst of the credit crisis), will be sufficient to move Europe out of an “I told you so” attitude and into the direction of cooperating with the US in efforts to organize a global strategy.
The G20 meeting, for all intents and puposes, was a photo-op at best. Hopefully, when the next meeting reconvenes on day 101 of the Obama administration prepared, coordinated, large stimulative (and well-directed) fiscal packages will be instituted. There is, of course, a very strong chance that the global economic crisis will accelerate even more sharply to the downside by then… and, once again, be reactive and not proactive and hence of insuffient influence so that again policy actione are way behind the curve.
Any Austrian economist will tell you that debt-financed stimulus is one of the major causes of the problem in the first place. Read up on the Austrian Business Cycle to know why artificially lowered interest rates created this economic collapse.
If new regulatory systems are implemented which provide transparecy to markets (derivative markets) which have been opaque in the past, I say more power to them.
But really! How fast can the world actually come up with a new regulatory system? How long will it take for disagreeing powers to debate and hammer out a consensus? Can we really expect the entire world to agree on something this complex and obscure before the end of 2009?
I say, get started now because it will take a while before it can be agreed upon and implemented.
And when new regulations are in force, hopefully lenders can be assured that they know what is the financial health of entities they are lending to.
I agree that stimulus plans are the most important tactic at this point. For little progress on that front, we can blame the Bush administration. Bush and his administration could have demonstrated leadership by stating at the G-20 that they were dedicated to working with Congress and the incoming administration to tailor a large stimulus package in the U.S. Even if it could not be completed immediately, at least they could have started working on it. Instead we are losing two precious months, waiting for Obama to take over. The economy will likely degrade precipitously in that time.
If the U.S. had stated its intent to launch a new stimulus package with a ball park figure, it would likely have inspired other nations to do likewise.
Thanks, Dubya. You’ve been a real boon to the world.
No one will work or do any dealmaking with Bush, neither domestically nor internationally….you are correct this delay is a major issue.
I agree with your concern that short term action by the authorities may excessively focus on financial regulation in a desperate attempt to “punish the guilty.” In reality any new regulation while important for long term financial stability will not do anything to get the economy moving again.
That said, given the political nature of politics, it might be best to try to refocus the zeal for short term regulatory reform on establishing simple, workable principles that can then be enacted by the various country specific regulators rather than trying to fight it.
Here are my suggestions for a few simple regulatory principles that would lead to significantly safer global financial system.
Regulatory capital charges should be based on systemic risk, not solely on market risk factors. By definition, an instrument that is traded in the OTC market that is contractually identical to a listed exchange instrument has identical market risk characteristics. But by now, it should be obvious that the lack of transparency, liquidity and credit and risk netting facility that are proved by an exchange make the OTC instruments far more likely to cause systemic damage. Hence capital charges for OTC instruments must reflect this lack of transparency and netting facilities by appropriately higher capital charges.
Consolidate regulators to ensure consistency and eliminate regulatory arbitrage. It seems too much to expect consistent global regulation, but the fragmented regulatory structures especially in the United States are anachronistic at best. Most financial firms sell multiple products in multiple geographies. If they have the same risks they should have the same regulator. The spurious distinction between insurance companies and Investment Banks was clearly exposed by the AIG bailout. The myriad product specific and state specific regulatory structure should be dismantled and replaced by only a few regulatory agencies that are given broad mandates.
Regulatory charges should be based upon company form. Michael Lewis wrote a good piece that can be summarized as Investment Banking went down the wrong path when it abandoned it’s long help partnership form. Perhaps more relevant is a corollary that the systemic risk of firm balance sheet exposures are markedly increased when the incentives are misaligned. We are all aware of the discussion of the pitfalls of the current bonus system where it is often a heads I win, tails the government steps in. Partnership structures are inherently safer because the entire net wealth of the general partners adds a layer of funds that can be called upon before taxpayers are forced to bail out the errant firm. I am philosophically opposed to current proposals to have the government determine the “fair” pay of senior executives. But, at the same time, we all need to understand that general partnerships and perhaps equivalent restricted stock type payment schemes align incentives far better than current systems and provide another layer of at risk capital before calling on public funds.
Just in regards to Craig Heymark’s last point:
I’m not sure that a partnership form would change things much, since you can’t have the whole financial system organized as partnerships. Lending firms (i.e., commercial banks) basically haven’t been partnerships since forever and they too have gotten in lots of trouble. But they are cushioned by (a) regular lending business and (b) regulations on capital requirements. The separation between investment banking and commercial banking was always artificial (Glass-Steagall) — and since its repeal, i-banks had been steadily heading into mergers with publicly-traded commercial banks.
Frankly, I’d rather see risk mitigated by capital requirements than by relying indirectly on some privately-chosen legal form like the partnership.
The exercise of G-20 is only a eye wash and making the public fool showing that everybody is concerned with gravity of situation and shall do somthing. What Somthing is not known to any body. It is like this that “A girl (Economy) has been raped; Finance Ministers of the world (Police) is making all the efforts to catch the culprit who is standing before them (execeesive borrowing with no regulation control)but no body dares to catch him.
Friends, The CEO of all these companies be sacked and recover all the remunerations in shape of bonus paid to them during last three years and let the companies be declared insolvent. Let the owners suffer for the lossess. Their personal assets be impounded and the money of the depositors be protected at all cost. Why the general public should suffer from the ill deeds of these smart CEO and also rating agencies be penalised as they also failed to know the nerve of the economy becuase they were interested in their huge fees and consequently huge bonus amount to CEOs.