Talking-shop-on-Thames

BIG ECONOMIC POWERS DECIDE THE FATE OF THE GLOBAL ECONOMY “LIKE King Charles II, the Economic Conference is taking an unconscionable time to die,” lamented The Economist in 1933, halfway through an epic—and ultimately fruitless—gathering of world powers in London to prevent the spread of protectionism in the depths of the Depression. That conference lasted more than a month, with the dollar sinking and tempers rising the longer it dragged on. At least there is no danger of interminable drift when leaders of the Group of 20 gather in London next month to address the worst economic crisis since the 1930s. They have set themselves just one day, April 2nd, to do what their predecessors failed to accomplish in weeks: tackle the crisis and consider ways to remake the rules of finance. This weekend G20 finance ministers and central bank governors attending a preparatory meeting in London may well attempt to limit expectations. More pressingly, they will have to heal an awkward sense of transatlantic disunity that has emerged in the run-up to the meeting. The tensions were exposed at an assembly of European finance ministers on March 9th and 10th. The ministers responded sharply to a call by Lawrence Summers, the White House economic adviser, for everyone in the G20 to focus on boosting global demand. Such calls were “not to our liking,” sniped Jean-Claude Juncker, Luxembourg’s prime minister and the chairman of the meeting. The cause of harmony may not have been helped when Britain’s most senior civil servant was quoted as saying the shortage of staff in Barack Obama’s two-month-old Treasury was making preparations for the summit “unbelievably difficult”. (Tim Geithner, the treasury secretary, disputes that.) In reality, the tensions appeared more symptomatic of the opening of bargaining than of a disastrous rift. The G20’s agenda focuses on three broad areas: sorting out the crisis through fiscal and monetary means and by encouraging banks to lend; medium-term regulatory reforms; and strengthening multilateral bodies such as the IMF so that they can give more help to crisis-hit developing countries. Everyone has different priorities. America feels its counterparts are not doing enough to boost demand. It would like them to pledge a fiscal stimulus equal to 2% of global GDP this year and next, and for the IMF to monitor compliance. Some countries would also like the European Central Bank to make better use of its monetary arsenal, as the Federal Reserve and the Bank of England have. America has indeed done a lot to stimulate growth (see table). The IMF, however, notes that taking into account automatic stabilisers, such as welfare payments to the unemployed, Germany’s fiscal response is not as far behind America’s as it appears. Not only does Germany feel its spending package is big enough, it is pressing for a quick return to balanced budgets when the crisis is over. Although transatlantic differences have emerged over fiscal policy, they are narrowing over regulation. Germany and France have long battled to persuade America and Britain to regulate hedge funds, which are clustered in the financial centres of New York and London. America is now prepared to countenance regulation of systemically important ones. Since the G20 leaders first met in November, their deputies have laboured on reforms to the stricken global financial system, in particular through the Financial Stability Forum (FSF), a Basel-based group that met in London this week. These include reforms that would affect bank regulators, supervisors and accounting standard-setters, and cover bankers’ pay, derivatives trading and rating agencies. America, chastened by its own regulatory failures, is now more supportive of tougher, co-ordinated global regulatory standards but only to a degree: it is unenthusiastic about uniform standards for executive pay pushed by Britain. In addition, the FSF is expected to propose to the G20 ways to make bank regulation less pro-cyclical, by making forward-looking provisions against bad loans rather than the “incurred-loss” method now in use—though not so that banks can use the provisions to massage earnings (see article). It will suggest incorporating a leverage ratio into bank-capital requirements, to supplement the existing risk-weighting of assets. It is also helping set up cross-border supervisory colleges to share information about 30 global banks. Illustration by S. Kambayashi There is general support for doubling the IMF’s resources to $500 billion, but America would like it to have even more. It is not clear how the increase would be funded. Reserve-rich countries like China could contribute more, as Japan did with a $100 billion pledge in February. But some fear that strings might be attached to such money, such as less criticism of China’s exchange-rate policy. Mr Geithner has proposed the IMF’s credit line with 26 rich member countries be dramatically raised to $500 billion from $50 billion. Some of the trade-offs will be driven by political considerations. French and German voters, for example, lay part of the blame for the crisis on hedge funds and tax havens, even though both played minor roles compared with the highly regulated banking system. Likewise, Mr Geithner is pressing for higher global capital standards for non-bank financial firms (such as American International Group, a big insurer), in part to reassure taxpayers that this sort of crisis and the accompanying bail-outs will not be repeated. Given the importance of the summit to the reputations of Gordon Brown, its British host, and Mr Obama, on his first overseas trip since taking office, every effort will be made to trumpet such progress. Few expect a 1933-style fiasco, though participants believe that given the tensions exhibited this week, a narrowing of differences is more likely than any “grand bargain” to put the world to rights. The best that might emerge from the summit is proof that leaders of the world’s biggest economies continue to talk to each other. Given the urgency of the situation, and the immense capital that Mr Obama still holds abroad, the world might have hoped for more. Talk, like so much else in this financial crisis, is cheap.

MAKING FINANCE WORK FOR HUMANS

A bitter lessoon we have to learn the hard way The financial crisis is a systemic crisis that emerges in the context of global crises (climate, food, energy, social…) and of a new balance of power. It results from 30 years of transfer of income from labor towards capital. This tendency should be reversed. This crisis is the consequence of a capitalist system of production based on laissez-faire and fed by short term accumulation of profits by a minority, unequal redistribution of wealth, an unfair trade system, the perpetration and accumulation of irresponsible, ecological and illegitimate debt, natural resource plunder and the privatization of public services. This crisis affects the whole humanity, first of all the most vulnerable (workers, jobless, farmers, migrants, women…) and Southern countries, which are the victims of a crisis for which they are not at all responsible. The resources to get out of the crisis merely burden the public with the losses in order to save, with no real public benefit, a financial system that is at the root of the current cataclysm. Where are the resources for the populations which are the victims of the crisis? The world not only needs regulations, but also a new paradigm which puts the financial system at the service of a new international democratic system based on the satisfaction of human rights, decent work, food sovereignty, respect for the environment, cultural diversity, the social and solidarity economy and a new concept of wealth. Therefore, we demand to: • Put a reformed and democratized United Nations at the heart of the financial system reform, as the G20 is not the legitimate forum to resolve this systemic crisis. • Establish international permanent and binding mechanisms of control over capital flows. • Implement an international monetary system based on a new system of reserves, including the creation of regional reserve currencies in order to end the current supremacy of the dollar and to ensure international financial stability. • Implement a global mechanism of state and citizen control of banks and financial institutions. Financial intermediation should be recognized as a public service that is guaranteed to all citizens in the world and should be taken out of free trade agreements. • Prohibit hedge funds and over the counter markets, where derivatives and other toxic products are exchanged without any public control. • Eradicate speculation on commodities, first of all food and energy, by implementing public mechanisms of price stabilization. • Dismantle tax havens, sanction their users (individuals, companies, banks and financial intermediates) and create an international tax organization to combat tax competition and evasion. • Cancel unsustainable and illegitimate debt of impoverished countries and establish a system of democratic, accountable, fair sovereign borrowing and lending that serves sustainable and equitable development. • Establish a new international system of wealth sharing by implementing a progressive tax system at the national level and by creating global taxes (on financial transactions, polluting activities and high income) to finance global public goods. We call on NGOs, trade unions and social movements to converge in order to create a citizen struggle in favor of this new model. We urge them to mobilize all over the world, in particular in the face of the G20, from March 28th onwards.

End of the Greenspan error

HOW THE MASTER OF THE UNIVERSE STRIPPED HIMSELF At least he was sincere about it and that is the only In saying he was "absolutely" wrong about how markets behave, Alan Greenspan has admitted his own ignorance There was a time when investors and members of Congress hung on Alan Greenspan's every nuanced word. Now and then some may have politely suggested that perhaps he should ease up on interest rates, but they would never have dared to think that his encyclopedic view of the economy was in any way flawed or mistaken. Yesterday Greenspan broke that bubble by admitting that he may have been wrong in an appearance before the House oversight and government reform committee: I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," Mr. Greenspan said. The mistake was fundamental. "You found that your view of the world, your ideology was not right, it was not working?" said California congressman Henry A Waxman, the committee chairman. "Absolutely, precisely," Greenspan said. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well." To hear Alan Greenspan admit that his way of seeing the world was "absolutely, precisely" wrong is to mark the end of an era. There was a time when Greenspan conferred his blessing on the proliferation of derivatives. He opposed regulating derivatives because they spread the risk and made cheap credit more widely available. The trouble is that the prices of this cheap credit began to lose any connection to reality as derivatives proliferated. As mortgages - which themselves were based on a real estate bubble - were dismembered and repackaged, the resulting derivatives became detached from the value of the underlying assets. Collateralised Debt Obligations, or CDOs, were given triple-A credit ratings and traded by bankers who never saw the properties or looked at the credit profiles of the borrowers. The risk may have been spread, but the price of the risk was badly underestimated. Two weeks ago, Nell Minow of the Corporate Library proposed the Paul Volcker rule (named after the former Federal Reserve chairman) in an appearance before the same House committee: "If Paul Volcker can't understand it, it shouldn't be on the market." Greenspan admitted that he and some other really smart folks didn't understand the derivatives market they had allowed to flourish, despite the "best insights of mathematicians and finance experts," sophisticated computer modeling and at least one Nobel prize in economics: The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. We have seen it over and over again in the Age of Greenspan: hedge funds got their name by hedging risks, but derivatives can be used to double down on risk just as easily. New financial instruments were declared to be so diabolically clever that they couldn't possibly fail. Sophisticated equations allowed bankers and hedge fund managers to price risk to within an inch of their lives, or so they thought; they were actually living far beyond any rational capital requirements. When Long-Term Capital Management, which hired some of those Nobel laureates, failed 10 years ago, Greenspan had to orchestrate a rescue using investment bank funds. LTCM was wound up, but its techniques spread quickly through Wall Street. Investment banks, which before the Age of Greenspan made money by managing money for clients, began trading for their own account. Managers were rewarded for taking on ever larger and more exotic risks that bore little resemblance to the underlying economic reality. One doesn't need a Nobel prize to know what brought about the collapse of this intellectual edifice. Humorist Roy Blount summed it up in a talk before an audience in Philadelphia earlier this week: "Money got too abstract, and that's why it went away"