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What didn't happen at the London summit matters more than what did
By the Monitor's Editorial Board, April 3, 2009 edition

By the time the G-20 nations gather again in November, perhaps this gang of economic heavyweights will have learned how to really handle a global recession.

As it is, their April 2 summit in London – while a noble show of global unity – mainly showed that what doesn't happen behind closed doors matters more than what does.

The Group of 20 meeting took place largely because of a demand by French President Nicolas Sarkozy to set up a global regulatory cop to rein in excessive risk-taking by financial institutions – mainly American and British.

For two reasons, he rightly didn't succeed.

As long as the world remains organized around sovereign states, capitalism will largely be regulated within each state. Even the European Union can't agree on tougher rules for hedge funds, etc.

A second reason is the difficulty of regulating complex financial instruments. Even the people who design them failed to see their flaws as this crisis unfolded. Would a global cop do any better at assessing such intricate risk? Exhibit A: The SEC's inability to uncover Bernie Madoff's scam.

The G-20 did agree to coordinate each country's new regulations through a new Financial Stability Board. But anyone who's ever held a job of "coordinator" knows there is no authority in it.

Mr. Sarkozy will have to settle for new regulations being set by the US and the UK. Even those restrictions would be better if they mainly forced transparency and higher capital reserves on financial institutions rather than tried to have regulators assess ever-more-exotic risky ventures.

The summit's effort would have been better directed at helping banks rid themselves of bad loans. As it was, on the very day of the summit, the US did far more to boost stock markets than the summit did.

The US changed its accounting rules so that banks with "toxic" assets, mainly bad mortgages, can "mark" those loans on their estimated long-term value rather than the "current" market. The old rules don't make sense when there is no market for such loans.

Another summit nonaction was the lack of any signal from China or other export-oriented economies to shift toward freer markets and more domestic consumption (despite China's big stimulus focused on transport infrastructure).

America's housing bubble would not have happened if it had not been inflated by China recycling its nearly $2 trillion in reserves, earned largely from its anti-market policies. Those excess dollars only sloshed back into the US as easy-come-easy-go subprime loans. Why didn't President Obama call on Beijing leader Hu Jintao to stop manipulating China's currency and take stronger steps to turn 1.3 billion Chinese into a world engine of consumption like the US?

Mr. Obama was quite clear in his pre-summit calls for Europe, mainly Germany, to stimulate their economies. Again, nothing happened on that point.

The summit did ask all nations not to resort to trade barriers to preserve their economies. But it failed to point fingers at countries now engaging in protectionism – such as the US. And it did not set a date for renewing talks in the Doha trade round. Such a step would have kept a forward momentum on trade liberalization.

In the end, the summit's best action was a promise by a few nations to provide the International Monetary Fund with up to $500 billion to rescue countries facing an economic cliff. That's necessary charity for the world's poorest nations but not a recession-killer.

Obama described the summit's results as "OK." Let's hope the next G-20 meeting is more than OK.


 

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