G20 what did it really achieve?
Much of the Media coverage of the G20 agreement has pitched it as a compromise; the US and the UK got the spending they wanted and the French and Germans got the tougher regulation they were after. In fact there is no stimulus spending, just another trillion dollars of debt, and although statements about better regulation may sound good, there is very little meat to them. So if a ‘new Bretton Woods’ was what Gordon Brown was really aiming for, he fell a little short.
In terms of regulation the good news is the extension of regulatory oversight to hedge funds and credit rating agencies, something which should have been done a long time ago. However a disproportionate amount of attention seems to be being given to ‘tax havens’. This may be politically expedient but it’s not as if the Swiss were the ones who brought the world to the edge of ruin.
Also in the regulatory area the G20 agreed to create a global Financial Stabilty Board to replace the Financial Stability Forum, I can see the headlines now… “dramatic name change saves global banking system”.
In all seriousness the summit was never going to redraw the regulatory map because for all the talk of togetherness, people are still very nationalistic about banking. There is zero chance the US, the UK, the French, the Chinese… well anyone really, will give up control of their domestic banking system to an international regulator, so ‘transparency and cooperation’ was about all we could hope for.
When it comes to the spending agreements, the headline figure of $1 trillion dollars is made up of $750 billion dollars in funding for the IMF and $250 billion dollars to be set aside for trade credit, funded in part by existing programs. Essentially the $750 billion is a credit line for the member states of the IMF to draw loans against, not a commitment to any form of fiscal stimuli. How the IMF uses the funds remains to be seen.
So the markets rallied because an agreement is better than a French walk-out, but if anyone thinks that this is the silver bullet, they’re mistaken. One massive flaw with the G20 was that the most pressing issue of the day was off the agenda. There was no discussion about global currencies and the structural imbalance in saving and consumption across the world.
What this crisis should have taught us is the need for saver nations (China and the rest of Asia) to start consuming and the need for consumer nations (US and Europe) to start saving. Without this happening we simply resume the old system where US dollars (and Euros and Pounds) flow into exporter nations, who then lend them back to the countries they came from and maintain the credit fuelled consumption cycle in the western economies. This is after all where the credit bubble, and all our current problems, came from in the first place.
But to a certain extent the summit was more about providing a unified front, showing the world that political leaders are taking action and restoring confidence amongst the average consumer than anything else. Whether it has achieved that goal also remains to be seen but I guess we shouldn’t be too critical that they didn’t solve all of the world’s problems in a couple of days.
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