G-20 almost makes sense


By Chan Akya
Asia Times
June 8, 2010


It requires a slow news day for attention to be paid to meetings of the Group of 20 (G-20), especially the lesser ones starring the finance ministers and central bank governors as against the broader conclave that includes political heavyweights. In the past, the meetings have been about bromides and insignificant policy broadsides; at worst, the G-20 meetings have produced dangerous expansions of government attempts to counter the economic slide beginning in 2007.

This time, a two-day meeting in Busan, South Korea, which concluded on Saturday, also promised to be yet another meaningless meeting, but Friday changed all that, with the worse-than-expected non-farm payroll data from the United States and the declaration of a brewing sovereign crisis in Hungary that sent risk assets crashing on the day; the developments made me quite curious about any reaction from the G-20.

Before dwelling on the subject of the most recent meeting though, perhaps it is a good idea to think back about the "achievements" of recent meetings. After much chest-thumping and self serving Keynesian nonsense, the most recent meetings were all about fiscal responses that were supposed to reverse economic declines. Recognizing that many governments would be unable to move forward with their own steam, the G-20 also agreed on a more powerful remit for the International Monetary Fund (IMF).

Writing about the main G-20 meeting in April 2009, I commented:

As with the previous rounds of G-20 meetings, I actually did try to read the final, official statement from the gathering. Unfortunately the assembled brainpower completely lost me on the fifth point:

The agreements we have reached today, to treble resources available to the IMF to US$750 billion, to support a new SDR [the special drawing rights, or currency, of the International Monetary Fund] allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs [multilateral development banks], to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.

(Japan, the European Union and China will provide the first $250 billion of the increase in IMF rescue funds to $750 billion, with the $250 billion balance to come from as yet unidentified countries, Bloomberg reported. The G-20 said they would couple the financing moves with steps to give emerging economic powerhouses such as China, India and Brazil a greater say in how the IMF is run, the report said.)

In effect, the only tangible result of the G-20 meeting - the tripling of IMF resources - is astounding. The same people who drove the Latin American economy into dust and were responsible for widespread poverty in Asia in the aftermath of the Asian crisis; the very people who encouraged the idiotic accumulation of market-return independent foreign exchange reserves by Asian countries that subsequently caused the asset bubbles of the US and Europe; the very people who had no clue about the impending bubble burst up until the beginning of 2008, are now supposed to gather up the foresight and skills required to end an economic crisis whose only recent historic parallel was the 1929 depression in the United States; an event that took place a good 16 years before the IMF was itself created. (See G20 Piles Folly upon Folly, Asia Times Online, April 4, 2009).

In the event, it didn't take long for the withdrawal symptoms to set into the markets; barely a month after the first such agreement (for Greece) was initialed, the resulting withdrawal of risk appetite has catapulted not just Greece but much of southern Europe towards a crisis. The widening of the crisis mentality to outside the zone, ie to Hungary last week, as well as a focus on selling off resource-based currencies like the Australian dollar all certainly merit attention.

Look at the statement from last week's G-20 meeting and two main aspects stand out: firstly the withdrawal of support for broad-based fiscal stimulus strategies and secondly the continued fear surrounding the implementation of any new strictures on banks. The second point of the communique details the following:

The global economy continues to recover faster than anticipated, although at an uneven pace across countries and regions. However, the recent volatility in financial markets reminds us that significant challenges remain and underscores the importance of international cooperation. The G-20's strong policy response to the crisis has played a pivotal role in restoring growth and we stand ready to safeguard recovery and strengthen prospects for growth and jobs. We welcome the determined actions taken by the European Union, the European Central Bank and the IMF. We will pursue well coordinated economic policies. The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions. Within their capacity, countries will expand domestic sources of growth, while maintaining macroeconomic stability. This will help ensure ongoing recovery. In addition, structural reforms, development policies, particularly supporting the poorest countries, and ongoing efforts to refrain from raising trade and investment barriers and resist protectionist measures are required. Monetary policy will continue to be appropriate to achieve price stability and thereby contribute to the recovery.

Ignore the back-slapping at the beginning of the paragraph and go to the crunch part of the statement: "importance of sustainable public finances ... fiscal sustainability ... consolidation ... reduce deficits ... structural reforms ... resist protectionist measures". So the finance ministers and central bankers at least got the memo from the markets.

That said, there was no mention of the immediate near-term measures required to boost confidence, much less any notion of rewinding various commitments on the fiscal front that could help boost confidence over the near term.

Then the kid gloves came out, when discussing the financial sector. Point four of the communique is lengthy but also apparently without any discernible purpose or urgency:

Agreed further progress on financial repair is critical to global economic recovery. This requires greater transparency and further strengthening of banks' balance sheets and better corporate governance of financial firms.

Committed to reach agreement expeditiously on stronger capital and liquidity standards as the core of our reform agenda and in that regard fully support the work of the Basel Committee on Banking Supervision and call on them to propose internationally agreed rules to improve both the quantity and quality of bank capital and to discourage excessive leverage and risk taking by the November 2010 Seoul Summit. It is critical that our banking regulators develop capital and liquidity rules of sufficient rigor to allow our financial firms to withstand future downturns in the global financial system. As we agreed, these rules will be phased in as financial conditions improve and economic recovery is assured, with the aim of implementation by end-2012. We welcome the progress on the quantitative and macroeconomic impact studies which will inform the calibration and phasing in, respectively. We are committed to move together in a transparent and coordinated way on national implementation of the agreed rules. Implementation of these new rules should be complemented by strong supervision.

Emphasized the need to reduce moral hazard associated with systemically important financial institutions and reinforced our commitment to develop effective resolution tools and frameworks for all financial institutions on the basis of internationally agreed principles. We look forward to the FSB's interim report to the Toronto Summit.

Agreed the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions, where they occur, to repair the banking system or fund resolution. To that end, recognizing that there is a range of policy approaches, we agreed to develop principles reflecting the need to protect taxpayers, reduce risks from the financial system, protect the flow of credit in good times and bad, taking into account individual country's circumstances and options, and helping promote level playing field. The IMF will deliver their final report at the Toronto Summit.

Committed to accelerate the implementation of strong measures to improve transparency, regulation and supervision of hedge funds, credit rating agencies, compensation practices and OTC [over the counter] derivatives in an internationally consistent and non-discriminatory way. We called on the FSB [the Financial Stability Board, tasked with reforming the global financial system alongside the Basel Committee on Banking Supervision] to review national and regional implementation in these areas and promote global policy cohesion. We also committed to improve the functioning and transparency of commodities markets.

Expressed the importance we place in achieving a single set of high quality, global accounting standards and urged the International Accounting Standards Board and the Financial Accounting Standards Board to redouble their efforts to that end. We encouraged the International Accounting Standards Board to further improve involvement of stakeholders.

The choices of verbs are interesting and instructive: "committed to reach agreement ... rules will be phased in ... need to reduce moral hazard ... fair and substantial contribution towards paying ... express the importance we place ...". Apparently, stronger and more action-oriented phrases like "mandatory levy", "immediate implementation", "instruct financial firms", "regulate" couldn't be found in the dictionaries on hand across Busan.

The avoidance of a mandatory banking levy - at the behest of Canada, Brazil and Japan, where the governments didn't have to rescue banks - is probably welcome news in that at least the notion of cohesion with respect to such an action was clearly missing. That does prompt the unfortunate re-emergence of regulatory arbitrage by banks as they move headquarters around to benefit from the "best" banking environments.

What does the G-20 communique really mean? I am happy to say "not very much". That is good news, because it could well be the first time that governments around the world have so explicitly acknowledged their own lack of ideas with respect to the financial crisis. Previous attempts to re-inflate assets by the expedient of using government finances have fallen flat.

In economic terms, the gross domestic product multiplier of new government debt is probably negative, with even apologists claiming it is neutral at best. In that environment, the best thing to do would be to cut back the role of government in the economy; which neatly dovetails with the notion of cutting back plans for a global bank levy, in turn admitting that future bailouts of banks wouldn't be quite so easy to engineer.

Simply put, without governments having the capability to bail out creditors, volatility with respect to banks would likely increase dramatically.

http://www.atimes.com/atimes/Global_Eco ... 8Dj04.html