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Will showdown on Global Financial Regulation be averted at the G-20 Summit?
By Kaufmann | March 31, 2009 2 Comments »
The stillness of the dark wee hours of Wednesday in London is already being disrupted by the news buzz of a likely showdown between the leaders of France and Germany, Sarkozy and Melkert, vs. Barack Obama of the US. This in the eve of the G-20 Summit here…
The Europeans appear to be prepared to explicitly demand a highly coordinated and tight framework of global financial regulations. Otherwise agreements at the G-20 summit would be off, BBC reports. It is clear that the US does not want to subscribe to a tight or coordinated global framework, even though they are prepared to revamp their regulatory framework according to their own blueprint, as outlined by US Treasury Secretary Geithner over the past few days…
A basic problem is that there are too many competing objectives regarding the financial sector: autonomy, integration and stability. They are not fully compatible with each other, particularly in the shorter term. Tradeoffs and prioritization are unavoidable. Going too far the ‘autonomous’ route will damage integration (already a concrete threat with the rising specter of financial protectionism, and the unsolved problem of regulating large cross-border financial institutions). And so on.
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A second basic challenge is the apparent tension between financial injections and regulatory reforms. The US has focused on aggressive fiscal policy and bailouts to address the crisis, and has been forcefully advocating that the other large economies follow suit. Some key European economies have relented, however (witness the recent comments from Berlin and Prague…) who opt for a conservative fiscal stance even during a demand-led crisis, while accuse the US from insufficient attention to serious regulatory reforms.
This is a false dichotomy. Given the nature of the crisis, both are sorely needed: a Keynsian-like large countercyclical global fiscal stimulus, complemented by serious regulatory reforms. They neither substitutes nor incompatible. Germany may be in denial regarding the need for a more aggressive fiscal stance, and, until recently, the US may have been in some denial regarding the need of far reaching regulatory reforms. Of course this does not mean that either the fiscal stimuli or the regulatory reforms need to be globally mandated or uniform. Country-specific tailoring (to the national politics as well…) is part of reality, and just mandating new global regulatory institutions may not solve the main issues either.
So it is important not to derail progress due to grandstanding squabbles, when there is no either or. The urgent forging ahead of fiscal stimuli by the US and some other key nations (minimizing ‘pork’ if possible, and maximizing medium term return to macro-stability…) cannot be halted at this juncture.
But there is another important (and unsung) denial, this one shared by all: the need to look into how decent regulations, policies, laws and budgetary plans get bent out of shape over time through undue vested interests and elite capture. Whether it is in the ‘pork’ of special appropriations in expanded budgets, or the lobbyists and vested interests influencing which banks get bailed out and how generously (vs. automobile industry?).
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Further, such undue elite influence, capture and legal corruption matters also regarding the regulatory framework: the main leaders within the G-20 may have heated discussions on what the regulations will look like in paper, but often the formal regulations do exist in the books and in fact it is in the implementation failures where the main problem may reside. Witness for instance how in the US the SEC turned a blind eye on its oversight of the 5 largest invesment banks, even though following the fatefully brief meeting in April 2004, when an agreement was reached.
More broadly, as a few other analysts and myself have been suggesting, let us keep in mind that as antecendent to the crisis in the US financial system there was a systemic failure of oversight, disclosure and regulation, each of which can in turn be traced in large measure to regulatory capture and legal corruption. Revamping the set of incentive and transparency requirements, as well as illegalizing legal forms of corruption and instituting mechanisms to avoid regulatory implementation failure also need integral part of the reforms.
Topics: Corruption, G-20, Public Financial Management, Public-Private Linkages, Regulation & Security, Rule of Law, capture, financial crisis | | 2 Comments
April 1st, 2009 at 7:31 pm
The economist, Dr. Susanne Trimbath has an excellent analysis of Geithner’s plan and its shortcomings. Here’s the link:
http://www.newgeography.com/content/00712-geithner%E2%80%99s-reforms-more-power-center-may-appeal-europeans-but-won%E2%80%99t-work-us
May 31st, 2009 at 3:17 pm
HI looks very interesting! bookmarked your blog. john brightman