The Wall Street Journal - Opinion
NOVEMBER 14, 2008
As committees to save the world go, Saturday's Washington confab of the Group of 20 world leaders may be the most poorly timed in history. In their wisdom, the politicians have decided to meet to solve the world's financial troubles smack in the middle of a U.S. Presidential transition. But thank heaven, at least the Saudis and Brazilians will be there.
For some world leaders, this timing is part of the appeal. They know President Bush is on his way out and at a low popular ebb, while Barack Obama hasn't even named a Treasury Secretary. From the safe harbor of Chicago, the President-elect is dispatching a pair of supporters with no great experience in global finance -- former Congressman Jim Leach and former Secretary of State Madeleine Albright -- to attend on his behalf. He is right to keep his distance before he has his own economic team in place.
All of which makes the meeting a wonderful forum for other national leaders to grab the limelight of statesmanship, real or imagined. British Prime Minister Gordon Brown has been especially voluble, yesterday suggesting that the world should pass a coordinated fiscal stimulus. "By acting now we can stimulate growth in all our economies," said the PM, without offering many details. "There is a need for urgency."
In fact, the need is for sensible, reassuring policy, and a global government spending spree financed with higher taxes or more borrowing won't stimulate much of anything save perhaps Mr. Brown's approval ratings.
Mr. Brown has also been talking up the idea of a new global regulatory body to monitor the world's largest financial institutions. We would have thought the far more urgent task is to assess and correct the mistakes that were made by various national regulators. Or for that matter, to reflect on the ways in which global financial regulators themselves contributed to the current mess.
To wit: The Basel II international standards for bank capital were well intended, but in retrospect they created perverse incentives for risk-taking. As Columbia business school professor Charles Calomiris put it recently on these pages: "The Basel rules outsourced the measurement of risk to ratings agencies or to the modelers within the banks themselves. Incentives were not properly aligned, as those that measured risk profited from underestimating it and earned large fees for doing so."
Given the dominant American role in global finance, a new international regulator is one more way for the Lilliputians to tie down Gulliver. We're all for nations working together for common standards that improve business efficiency across borders. But Europe has all too often used its regulatory standards to punish American companies -- witness its antitrust assaults on Microsoft and GE.
Recall that even as they created a European Central Bank for monetary policy, France and Germany reserved financial regulation for their own national governments. Meanwhile, the European nation that showed the most foresight in creating a capital cushion for banks before the panic -- Spain -- isn't even invited to the weekend shindig.
The better message for this summit should be -- politician, heal thyself. The U.S. has a large enough task ahead in reforming its own regulatory bodies over the course of the next year. The same goes for Europe, whose banks have in general performed even more poorly during the panic than have U.S. institutions.
The real need for global cooperation isn't regulatory so much as monetary. The world's central banks have done a great deal to contribute to the panic with erratic monetary policy, causing sharp and exaggerated currency shifts that distort the allocation of capital. More central bank and currency coordination should be on the agenda of the next U.S. Treasury Secretary, if he has the wit to understand the potential economic gain. (See Judy Shelton's provocations here.) But building a Bretton Woods for the 21st century will still take more than a day, even if the leaders work through lunch.
The other way the G-20 can do more than talk is by making the compromises necessary to complete the Doha Round of trade liberalization. Beggar-thy-neighbor trade and currency policies contributed to the Great Depression, and a Doha failure would mean that the world's protectionists are on the march. The problem for French President Nicolas Sarkozy and others, of course, is that Doha requires making difficult domestic political compromises too. It's so much more fun to come to Washington and opine on the faults of cowboy capitalists.
On that score, we'd note that yesterday Mr. Bush gave a speech that was the most spirited defense of free markets that any political figure has offered in many months, if not years. He began speaking in Manhattan at a little before 2 p.m., not long after the stock market had started to rebound from another bad day. Stocks continued to climb before finishing up nearly 7%. Many things make a market, and we can't say what role Mr. Bush's remarks played. But amid a global recession with frightened capital sitting on the sidelines, the G-20 could help merely by declaring a similar confidence in the benefits of capitalism.
NOVEMBER 14, 2008
As committees to save the world go, Saturday's Washington confab of the Group of 20 world leaders may be the most poorly timed in history. In their wisdom, the politicians have decided to meet to solve the world's financial troubles smack in the middle of a U.S. Presidential transition. But thank heaven, at least the Saudis and Brazilians will be there.
For some world leaders, this timing is part of the appeal. They know President Bush is on his way out and at a low popular ebb, while Barack Obama hasn't even named a Treasury Secretary. From the safe harbor of Chicago, the President-elect is dispatching a pair of supporters with no great experience in global finance -- former Congressman Jim Leach and former Secretary of State Madeleine Albright -- to attend on his behalf. He is right to keep his distance before he has his own economic team in place.
All of which makes the meeting a wonderful forum for other national leaders to grab the limelight of statesmanship, real or imagined. British Prime Minister Gordon Brown has been especially voluble, yesterday suggesting that the world should pass a coordinated fiscal stimulus. "By acting now we can stimulate growth in all our economies," said the PM, without offering many details. "There is a need for urgency."
In fact, the need is for sensible, reassuring policy, and a global government spending spree financed with higher taxes or more borrowing won't stimulate much of anything save perhaps Mr. Brown's approval ratings.
Mr. Brown has also been talking up the idea of a new global regulatory body to monitor the world's largest financial institutions. We would have thought the far more urgent task is to assess and correct the mistakes that were made by various national regulators. Or for that matter, to reflect on the ways in which global financial regulators themselves contributed to the current mess.
To wit: The Basel II international standards for bank capital were well intended, but in retrospect they created perverse incentives for risk-taking. As Columbia business school professor Charles Calomiris put it recently on these pages: "The Basel rules outsourced the measurement of risk to ratings agencies or to the modelers within the banks themselves. Incentives were not properly aligned, as those that measured risk profited from underestimating it and earned large fees for doing so."
Given the dominant American role in global finance, a new international regulator is one more way for the Lilliputians to tie down Gulliver. We're all for nations working together for common standards that improve business efficiency across borders. But Europe has all too often used its regulatory standards to punish American companies -- witness its antitrust assaults on Microsoft and GE.
Recall that even as they created a European Central Bank for monetary policy, France and Germany reserved financial regulation for their own national governments. Meanwhile, the European nation that showed the most foresight in creating a capital cushion for banks before the panic -- Spain -- isn't even invited to the weekend shindig.
The better message for this summit should be -- politician, heal thyself. The U.S. has a large enough task ahead in reforming its own regulatory bodies over the course of the next year. The same goes for Europe, whose banks have in general performed even more poorly during the panic than have U.S. institutions.
The real need for global cooperation isn't regulatory so much as monetary. The world's central banks have done a great deal to contribute to the panic with erratic monetary policy, causing sharp and exaggerated currency shifts that distort the allocation of capital. More central bank and currency coordination should be on the agenda of the next U.S. Treasury Secretary, if he has the wit to understand the potential economic gain. (See Judy Shelton's provocations here.) But building a Bretton Woods for the 21st century will still take more than a day, even if the leaders work through lunch.
The other way the G-20 can do more than talk is by making the compromises necessary to complete the Doha Round of trade liberalization. Beggar-thy-neighbor trade and currency policies contributed to the Great Depression, and a Doha failure would mean that the world's protectionists are on the march. The problem for French President Nicolas Sarkozy and others, of course, is that Doha requires making difficult domestic political compromises too. It's so much more fun to come to Washington and opine on the faults of cowboy capitalists.
On that score, we'd note that yesterday Mr. Bush gave a speech that was the most spirited defense of free markets that any political figure has offered in many months, if not years. He began speaking in Manhattan at a little before 2 p.m., not long after the stock market had started to rebound from another bad day. Stocks continued to climb before finishing up nearly 7%. Many things make a market, and we can't say what role Mr. Bush's remarks played. But amid a global recession with frightened capital sitting on the sidelines, the G-20 could help merely by declaring a similar confidence in the benefits of capitalism.
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