MARKING TIME

Nov 17, 2008 Editorial

Back in June, in our editorial, “Reforming the International Economy”, we pointed out: “Over the last decade, there is a growing consensus among both governments and independent experts that the existing global monetary and financial arrangements need extensive reforms to enable the international economy to generate and sustain growth at a reasonable rate in a stable environment… Overall, the key issues in global financial and monetary reform can be broadly categorised as the management of the global capital market, development finance for low-income countries, the exchange rate system and the role of special drawing rights.”
Since then, the contradictions of the financial system in developed economies of the U.S. and Europe have precipitated a financial meltdown that has led them into a recession and is threatening to throw the rest of the world into a tailspin.

Finally acknowledging the need for a concerted effort to prevent a repetition of the Great Depression of the 1930s, after being prompted by the President of France, President Bush convened a meeting of the leaders of G-20 last Saturday in Washington.

There was hope in some quarters that this meeting would be a “Bretton Woods II” – referring, of course, to the historic meeting of forty-four nations in the final days of WWII that redesigned the architecture of global finance.

Regretfully, the assembled leaders, who represented eight-five percent of global trade, simply issued a statement high on aspirations but very muted on concrete action. In effect, they have decided to mark time until their next meeting, scheduled for the end of the first quarter next year.

In their statement after the five-hour summit, the Group of 20 urged a “broader policy response” to spur growth, including potential interest-rate cuts and fiscal stimulus.

However, with no clear commitment to cut taxes and interest rates together, countries would simply do whatever they were doing before. But even the interest cuts will definitely be a matter of doing too little too late: the US is already at 1% and Japan at .3%, with every other country on a race to zero interest rate policy (ZIRP). It did not help Japan for a decade, or the U.S., and it will not help spur growth anywhere else either.

The statement blamed the crisis on investors who “sought higher yields without an adequate appreciation of the risks.” But they are ignoring the banks and other financial houses that created poisoned fruit in their rush for ever expanding mega-profits. In calling for the creation of “supervisory colleges” for bank regulators around the world to better coordinate oversight and share information about activities and risk-taking of international banks, they have not mentioned how they will overcome the opacity in valuating assets that make “information sharing” a joke.

On the key factors that laid the economies of the developed countries low, the group set a March 31 deadline for recommendations on tightening accounting standards, strengthening derivatives markets and increasing oversight of hedge funds and debt-rating firms.

After postponing market to market accounting, doing nothing about off-balance-sheet accounting, and blaming hedge funds for loose lending practices at banks, it does not appear that the fundamental controls that are necessary are on the horizon.

The Europeans and the Americans are divided on this issue, with the former showing greater faith in the possibility that some supra-national supervisory body is necessary for global financial markets to clear more efficiently.

The U.S. was afraid of the possibility of protectionist policies being instituted by some countries, and it was probably this eventuality that convinced Mr Bush to broaden the invitation away from the usual G-7 exclusive club, since the emerging markets like China and India, which are brought into G-20, are more concerned than even the U.S. that free trade should continue unimpeded.

Totally ignored was the fundamental cause of the financial crisis – allowing fractional reserve lending to run rampant, excessive leverage and credit creation, and unsound fiat currencies. In other words, the G-20 ignored discussing the very cause of the problem we are now facing. It is hoped that the decision to mark time is because the new U.S. Administration will not be in harness until next year.

The question is whether the financial meltdown, which is beginning to wreak havoc in the real economy, will allow us to mark time.

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