The Do-Nothing G-20
They fled Pittsburgh with vague promises to rein in their financial systems. But Jeff Madrick writes that the G-20 leaders didn't give this year of global peril its due respect.
Crisis can focus the mind. But can crisis focus 20 minds? This was the question asked in Pittsburgh last week, as President Obama hosted a meeting of the G-20—an expanded group of rich or fast-becoming-rich nations who will decide much of the course of the world’s economy. If this sounds unfair to the other 200 or so nations on the planet—the G-20 controls about 85 percent of the world’s wealth—it is a major improvement over its predecessor, the G-8.
We may not fully know as yet what was actually accomplished at Pittsburgh. But let’s hope more went on than met the eye because, aside from the formalizing of the G-20 itself, the final communique was a broad-brushed and mild agreement to cooperate on a wide range of timely and worthy issues, with few all-important details and no mechanism in place to assure enforcement of any one of them. The result was about as predictable as the press made it out to be. Hardly a feather will be ruffled. Being a club is not an adequate excuse.
Given the dimensions of this alarming crisis, in fact, it is possible this G-20 will be long remembered as an outright failure. Finance, trade, and stability were undone by grotesque levels of profit gouging, deep conflicts of interest, and regulatory irresponsibility. The world was brought to the edge of depression. The G-20 offers us no broad response in kind.
Given the dimensions of this alarming crisis, in fact, it is possible this G-20 will be long remembered as an outright failure.
Since the credit crisis of 2007-2008, it can no longer be argued that nation-states, the great political creation of the last thousand years or so, can contain capitalist excess. Money and debt are created today well out of sight of any regulator. Business can escape the regulations of one nation for another nation with little regulatory oversight at all. Dereliction of duty on the part of America’s Federal Reserve or Securities & Exchange Commission; excesses on the part of Bear Stearns, UBS, Bernard Madoff, or currency manipulation on the part of China, will have consequences everywhere. Trade and finance link all of us to each other’s excesses and mistakes.
• More Daily Beast G-20 coverageThe foreign minister of Mozambique, Oldemiro Marques Balói, perhaps put the issue of the new interconnectedness best in New York last Thursday as the U.N. General Assembly met. Balói noted that, in part because of International Monetary Fund pressure, Mozambique’s banks had stayed away from the toxic mortgage-backed securities that brought down so many of the world banks and put enormous holes in the portfolios of pension funds, hedge funds, and individual investors. For a while, this saved Mozambique from damage. But credit collapse, especially in the rich nations, soon brought falling demand for goods, sudden drops in commodities prices, and rising unemployment almost everywhere. Soon enough, Mozambique was suffering along with everyone else through no fault of its own. Balói’s appeal to the G-20 would normally have been that the rich nations keep their promises of more aid to the poor nations or to reduce their tariffs. But now his message to the G-20 was to fix the world economy first. He could also have added to never let it happen again.
With some glimmers of recovery, how to prevent further economic decline did not attract the attention it should have. The U.S. seemed most concerned about righting the damaging imbalances in the world, notably China’s trade surplus, America’s trade deficit, and the enormous flow of capital for China as a consequence, much of which wound up financing American mortgages. Europe and China saw this as more an attempt to tell them to cut back exports than to accept American blame for borrowing too much. China and others were thus more concerned about America’s federal budget deficit than their own exports. Europe interpreted the American emphasis on balancing the world as a way to fend off their more intense demands to restrict Wall Street bonuses that some on the Continent sought. Almost no one was ready to rough up the financial institutions very much, in fact.
The result was no strong statement for economic stimulus, hard-edged regulatory demands, or serious agreement returning balance to the world’s trade and capital flows. On the latter, what the leaders agreed to was a sort of “peer review,” in which national policies regarding exports and government spending will be analyzed, and those countries who offend most will be subject to chiding and potential embarrassment. The Financial Times pointed out that this was the kind of umpiring that Mervyn King, the beleaguered Bank of England Governor, thinks is right. There should be no red cards shown to throw players out of the game, as in soccer. Rather, regulators should be like the umpires in cricket, who urge players to act nice. Never mind that we came this close to a worldwide depression.
Even when some semblance of agreement was reached, such as on raising capital requirements for banks, the task of coming up with the details was kicked down the road. In characteristically loose language, the G-20 also agreed at most to restrain financial compensation by aligning it with long-term profits. There were no explicit limits to pay—a victory for the timid U.S. Treasury.
And about fixing the economy, the G-20 agreed only to say this: Maintain stimulus until the world economy is clearly out of the deep water, but then be prepared to end government support of the recovery in a gradual but credible way when this is accomplished. No doubt, cookies and milk were then passed around.
What could have been done instead? A clear statement could have been made that the world economy is not yet out of the woods and that the risks of inflation are exaggerated. Worries about debt levels are as yet premature. The degree of pain and suffering, especially among developing nations, could have been better emphasized. Thus, a consensus could have been defined that suggested the world leaders would risk the error of overstimulation, though such an outcome is unlikely. In the process, they could have pledged more funds sooner than later to help the poor nations stabilize.
There could have been a clear recognition and explanation of how global capital imbalances helped cause the crisis and a demand that the major nations each make a specific proposal about how to reduce these imbalances. The public and media need an education on this. The U.S. is not giving them one; neither is the G-20.
On re-regulation, someone must have favored cutting down the risk-taking investment options of traditional commercial banks so that they wouldn’t invest in high-risk strategies with savers’ money. If so, no one spoke up for dividing the financial industry, even a bit the way the U.S. did in the 1930s. At the least, a firm and shorter deadline should have been created to raise capital requirements. All focus should have been on that, if the waters were so muddied by conflicting objectives, instead of leaving it to some ambiguous future date.
It is still early in the life of the G-20. Over time, all will watch to see whether the organization is too unwieldy to make such needed proposals. And who is representing the truly poor? That will wait for another day.
If recovery does continue, and even tepid expansion follows, the G-20 may well lose what momentum it has. The Obama administration has already lost control of financial re-regulation in the U.S., having offered a shallow set of proposals and no supporting analysis in the first place. (The white paper issued in June was hasty and superficial.) Nothing of significance has yet been done by Congress and Wall Street is returning rapidly to business as usual. If the urgency to take action and meaningful reform now subsides among the G-20, the recurrence of global emergency is likely to be no more than a few years away.
Jeff Madrick is a contributor to The New York Review of Books and a former economics columnist for The New York Times. He is editor of Challenge magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.