The President has arrived in London for the G-20 economic summit. I have different policy views than the President on some of these issues, but I will not criticize him while he is overseas. I will attempt to gently highlight a couple of substantive issues that concern me, but at the same time I want to send a clear signal that I support the American President and his team in negotiations with other states, even if I am not in the same place on some of the substance.
I wrote last November about the first G-20 Economic Summit, initiated and hosted by President Bush. You can see some neat behind-the-scenes photos of the gorgeous National Building Museum and read about the accomplishments of that summit. Last November the press tried to write the story “Lame duck President – not much accomplished.” That storyline was incorrect. Now we have a new American leader and one fundamental policy shift, but much of the agenda remains consistent.
There is a symbolically important change to watch for in the text of the leaders declaration, compared to that in the November text. I fear that the word “free” may be absent in the successor statement to this sentence from the November leaders declaration:
12. We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems.
Losing “free” would be an enormous step backward. All G-20 nations agreed to the above statement last November, so there is no good reason to change it if the U.S. objects. In the short run, it is easy to see how a negotiator might give this up for a more concrete immediate objective. In the long run, few things are as important. I hope the American team will insist on repeating this language, and in particular keeping the phrase “a commitment to free market principles,” as our negotiator did last fall.
Four of the five major topics of discussion at the summit are extensions and continuations of the November efforts. There is one big difference, influenced greatly by our new President. After reviewing the available press and talking with Dan Price, President Bush’s “sherpa” for the first G-20 summit last November, here are my expectations for the London G-20 summit.
- Global macroeconomic stimulus — The big difference is the new #1 agenda item for the G-20, global macroeconomic stimulus. President Obama’s first domestic economic policy effort was the enactment of a law that he argues will stimulate near-term macroeconomic growth. He is pushing other nations to take similar actions, and for the G-20 as a whole to support similar global efforts.I expect the final G-20 statement will broadly support national actions for macroeconomic stimulus, but will not include any numbers. It will say something like “Nations should do what is necessary.” It may also emphasize the fiscal actions already taken by a large number of nations.Reading between the lines of President Obama’s answer to a question in a press conference this morning confirmed this expectation.
- Financial market stabilization — I expect this will be a continuation of efforts in November, but with some details fleshed out. The final statement will likely highlight three subgoals to financial stabilization: restarting lending, enhancing the capital structure of financial institutions (aka recapitalizing banks), and dealing with toxic assets. This is consistent with discussions from last fall, but I expect a greater American emphasis on the last item from the new team.
- Regulatory reform – While financial market stabilization focuses on short-term actions the G-20 nations need to take, the regulatory reform section will focus on longer-term reforms to reduce the chance that these same problems recur in the future. The negotiators and their staffs have spent a lot of time on these issues, and I expect the final product will continue to flesh out the construct created last November, with a lot of details now filled in.I expect an emphasis on improving oversight and greater cooperation among national regulators. To my delight, I do not anticipate any mention of any sort of “single global regulator.” There is a so-called “college of supervisors” that was part of the November and prior efforts, but my expert advisors on this subject assure me that this group is about coordination, not the creation of a supra-national sovereign group. Participant nations appear interested in coordination of national efforts while maintaining national sovereignty. This is a big deal for me. Let’s work together, but Americans should have the final say in what America does.There is an interesting debate about “convergence” of national regulatory structures that underlies this question. I expect the statement will emphasize the goal of “convergent” regulatory structures. A tension exists between two goals. We want a level playing field across nations so that government policies distort capital flows as little as possible. In this respect, convergence of national regulatory structures can be a good thing. At the same time, if they converge to a consensus position that is unwise, then that’s a bad thing. My own instinct is to worry that, in a politically governed process negotiated by national governments and regulators, there will be a tendency to converge to a structure that is overly restrictive and burdensome. This is a tension that will play out in obscure international regulatory fora over months and years, and can have long-lasting and important consequences on the international flows of capital. I could be OK in theory with “convergence” language, if I knew what the final details would look like. Since no one can know that in advance, “convergence” language makes me nervous now, as it did last November.
I further expect that the regulatory reform section will talk about the importance of better oversight of “systemically important institutions” (read: too-big-to-fail) in ways that parallel how Secretary Geithner, and Secretary Paulson before him, and Chairman Bernanke, have spoken about the issue.This will send an international signal that the problem of regulation of institutions that are deemed to be too big to fail is a critical area for future policy development. My own view is that this is the big enchilada. I trace back much (most?) of our current financial pain, as well as almost all of the tension between Wall Street and Washington, to consequences from being on the back end of a too-big-to-fail problem, where all options are terrible. I think it’s our primary long-term financial policy challenge. I wrote about the causes of the financial crisis last October, following a speech by President Bush.
There is an important follow-on question about the relative importance of strengthening the oversight of huge banks and insurance companies on the one hand, versus expanding regulation into hedge funds and private pools of capital on the other. I am absolutely convinced that the former needs major reform. I am far less certain that the second is as large of a problem. I am in the minority in this view. This is a topic for further discussion.
I also anticipate that the final statement will say something on tax havens. My views here on international convergence of taxation differ significantly from those expressed in the past by those who are now senior American officials. I will refrain from commenting while they are overseas negotiating. They have the ball for America.
I expect the regulatory reform section will talk about the importance of moving the trading of Credit Default Swaps (CDS) onto organized exchanges, which parallels efforts that Secretaries Paulson and Geithner have pushed here in the U.S. This is a good and important thing.
I expect the statement will continue to flesh out work to harmonize accounting standards. This is simultaneously mind-numbingly boring and incredibly important.
There will also be some structural changes to the Financial Stability Forum – they will change the name to the Financial Stability Board and add more members from the G-20. They will also have language, I think, similar to that in the November document on executive compensation.
- Increased resources for the IMF and restructuring of the World Bank and IMF– One of the advantages of being Treasury Secretary is you get some leeway to push issues that are important to you. Secretary Geithner has spoken of tripling the IMF’s budget, and Prime Minister Gordon Brown has spoken of doubling it. We will see where the number ends up, but it’s clearly going to increase. I am interested to see how willing Congress will be to fund the increased U.S. contribution.They will also change the governance structure of the IMF and World Bank. I anticipate that China and other developing countries will get more weight in decisions of these international bodies, but only if they pay their share of the budgets. There is an important thematic here for China and India that crosses a range of international economic policy issues. In international negotiations, China and India sometimes try to have it both ways. Their negotiators argue they should have the same say in international economic policy questions as major developed economies like the U.S., Japan, and major European economic powers. At the same time, they plead poverty and argue that they cannot possibly sacrifice economic growth for the global good. My view is: in or out. You decide. If you want to be a first-tier economic nation, that’s fantastic. You play by the same rules as everyone else, and you make the same sacrifices for the global good. You cannot have it both ways.Finally, I anticipate the U.S. and Europe will give up what some call the “knightship rights” of choosing the leaders of the World Bank and the IMF. I expect one result will be some kind of new (supposedly) merit-based selection process.
- Fighting protectionism – This is the topic that I hope will make almost all of the G-20 leaders uncomfortable. In November the G-20 leaders agreed to a fantastic strong statement that opposed protectionism, in which they said,
We underscore the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty. In this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports. Further, we shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO’s Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary.
And yet on March 17th the World Bank reported that 17 of the G-20 nations “have implemented 47 measures that restrict trade at the expense of other countries.” The U.S. is one of the 20, and the World Bank highlighted “the US direct subsidy of $17.4 billion to its three national