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September 20, 2009 11:36 pm
Economic summits are always more about messaging than substance. In recent days officials have been striving, they say, to “lower expectations” about what this week’s meeting of the Group of 20 leading nations in Pittsburgh might achieve. I had not noticed that expectations were dangerously high. I had supposed they could hardly be lower. Usually this would be no great cause for concern, but 2009 is different.
In many ways, events are following the standard pattern. One of the clearest messages from the first summit of this crisis, in November last year, was the collective commitment to hold back protectionism. Since then, every government has been bending or breaking international rules on subsidies and import barriers to protect jobs. Admittedly, they have shown some restraint, for which one is grateful. But the leaders’ fine words still cloak the classic beggar-thy-neighbour response.
On the very eve of the Pittsburgh summit, Barack Obama’s administration raised tariffs on Chinese tyres. This was probably technically legal under the World Trade Organisation’s “safeguard” procedures. It is protectionism nonetheless, and in plain breach of the earlier commitment, which Mr Obama has repeatedly affirmed. We shall see whether kneeling down to the unions in this case abates the demand for further protection, or stimulates it. My guess is the latter.
Ordinarily, this gap between words and deeds is a shame but not a disaster. Of course, many aspects of economic policy have an international dimension, and the optimal policy of economists’ fantasies often calls for co-ordination. Rebalancing global growth, for instance. To stabilise the global economy and improve its own prospects of steady growth, the US needs to export more and import less. This is well understood. The transition can go well for everybody if other countries, notably China, strive to import more and export less – or it can go badly, if collaboration of that sort is lacking.
But the point is that domestic politics, especially in the US, all but rules out this sort of co-operation. Balanced growth requires a dramatic change in US fiscal policy. The US has every selfish reason to do this unilaterally. In the end it will, even though the country cannot yet bring itself to think about it. But if the administration was ever to ask Congress to raise taxes because the US had promised other countries that it would curb its public borrowing, that would doom the proposal on the spot. Muddling through is the best that can be done, and more often than not it suffices.
Why then is 2009 different? Because stronger financial regulation is now so central in what needs to be done – and because unco-ordinated financial regulation, unlike unco-ordinated fiscal policy, cannot succeed.
At the recent G20 finance ministers’ meeting in London, Tim Geithner, the US Treasury secretary, won tentative, sometimes grudging agreement to his main ideas for stronger regulation. The single most important change, he believes, is requiring banks and shadow banks to hold more capital. He proposed higher capital ratios – higher still for systemically important firms, with new counter-cyclical components – and a cap on total leverage. To supplement these more demanding capital requirements, he also called for minimum levels of liquidity, and for “living wills” to allow the orderly winding up of failing financial firms.
All this makes excellent sense. If Mr Geithner’s proposals are acted on, the global financial system will be far better protected in future. This week’s summit will not budge fiscal policy, least of all in the US. All the talk about exit strategies – when and under what conditions to start withdrawing stimulus – is so much wasted breath. But bank regulation better had be strengthened, and in a closely co-ordinated way, or else governments will be leaving their countries as exposed as before to the risk of another financial crisis.
The global finance industry is in no position, yet, to mount a vigorous campaign against changes which, if they are adequate, will implicitly tax its growth. That is what higher capital requirements would do, and is precisely why they are needed. Checking the industry’s expansion must be seen as an aim of policy, not an unintended consequence.
An economic recovery is under way. The G20 leaders will be able to point to encouraging signs of growth. Memories will fade and the finance industry’s reticence, such as it is, will disappear. As that happens, governments will need to stick together in facing down the pressure for a less onerous bank capital regime. If co-ordination fails and some governments adopt tougher rules than others, this pressure will be far stronger, probably overpowering. Banks and shadow banks will argue that stronger capital rules in the US, for instance, put American financial institutions at a competitive disadvantage. It will be true, and Congress is fiercely attentive to that kind of argument.
The finance ministers left the details of new rules on capital vague. Everything depends on the numbers eventually attached to Mr Geithner’s new ratios. The presidents and prime ministers meeting this week are not going to nail those details down. But they can affirm the principles of Mr Geithner’s proposals without equivocation. They can mean it. Most important, in private, they can come to a frank understanding: they will have to press the issue far beyond the point at which their financial firms start to complain, and resolve to stick together.
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