You know Middle America is really nervous about the economy when an economic summit of the world’s leaders can generate so much weekend buzz.
The gathering of the G-20 leaders – who collectively control 85 percent of the world’s economic output – at this point has done no additional harm to the teetering global economy, but we Americans need to pay close attention.
College of supervisors
The G-20 leaders agreed to set up a “college of supervisors,” to examine the books of major financial institutions that operate across national borders. It was unclear how much power this unelected panel would have.
Although the G-20 participants were careful to say that national regulatory powers are the first line of defence, the group did not shy away from the need for greater global oversight.
The G-20 also demanded greater international scrutiny of hedge funds and disclosure of executive pay plans that reward excessive risk-taking.
And as part of the package, leaders agreed in concept to submit their countries’ financial systems to regular reviews by the International Monetary Fund, a move that some nations, including the United States, have rightly resisted.
These agreements are another step in giving greater leverage to a nameless, faceless world body, not accountable to any country’s citizens, to influence the economic systems of independent nations. It is a bit of an unnerving concept – which is why caution is of the utmost importance.
But to pretend that the economies of the world’s leading nations are not intricately intertwined would be to ignore reality.
The G-20 leaders agreed in principle on a range of issues, with details to be worked out in April – after President-elect Barack Obama is in office. That’s a sensible move that recognizes Obama should not be locked into agreements that his administration would have to help make work while trying to put the U.S. economy back on stable footing.
Given that within this particular pack of leaders are those motivated by their own personal and political agendas, rash decisions pushed in the waning weeks of a lame duck U.S. administration would have carried significant risks.
Notable achievements
There were, however, two notable achievements coming from this meeting. The first is the creation of a worldwide financial information clearinghouse that would provide greater transparency and information about global financial dealings but not have full regulatory powers.
The second is the recognition that the major economic powers – the G8 nations of the U.S., Canada, France, Germany, Italy, Japan, Russia and the United Kingdom – must now have more players at the table. The G-20 includes the emerging economies such as China, Brazil, India and Saudi Arabia.
These emerging economies are the best hope of producing the world’s economic growth next year. Any reforms to international financial markets must take into account the massive amount of wealth held by China and Saudi Arabia. Those assets will be crucial to warding off an even deeper financial crisis.
For Western leaders, this was significant recognition: The world’s superpowers cannot go it alone economically anymore.
What remains to be seen is exactly how these nations, and especially the U.S., respond to this new alignment of power and wealth.
Nonbinding commitment
For now, the 11-page statement issued by these world leaders is appropriately reserved in its ambitions. It begins with a non-binding commitment to new regulations and controls on international banks and rating agencies that would provide more transparency on financial derivatives market that have wreaked so much havoc worldwide.
Quite simply, as financial securities – such as those based on shaky subprime home loans from the United States – were packaged into derivative products and sold to investors worldwide, few who put their financial future on the line had a good understanding at the depth of the risk they were taking.
Nor did they know that investment houses were rewarding their CEOs to take such bad risks and that credit rating agencies often had conflicts of interests that made their advice less than trustworthy.
Certainly, the problem transcends national borders and requires a global remedy. But it must be one that respects borders.
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