Prelude to April's G-20 Meeting: Showdown at the London Corral

The Group of 20 meeting scheduled for London on April 2nd will be an important occasion for Mr. Obama, and, indeed, the entire world. The heads of state of twenty three of the world's largest economies will be at the meeting. The agenda, which was set at an emergency meeting in Washington last November, is vitally important to the economic recovery of the world's business and trading community.

At the November meeting, 47 points were agreed upon to be included in the London session. The major points were aimed at the financial crisis that was just then being recognized as serious, but has, since then, risen in magnitude. It is now seen to be the worst downturn in modern memory, rivaling the depression that gripped the world for more than a decade in the 1930s.

The G-20 meeting will take place at a time when the financial edifice of world trade is effectively frozen. The economies of the major industrialized nations are falling; emerging markets are suffering even more. The depth of the downturn gives a sense of urgency to the normally little-noticed meeting of the G-20 members. In the past, matters of a global slowdown would have been dealt with by the G-7 or G-8 members (G-8 includes Russia). But, the expansion of trade over the last decades is forcing a reshuffling of the deck chairs.

Specifically, expansion of emerging markets has altered the balance of power among the major economies. The engines of growth are no longer found in the G-7/8 membership. That title now belongs to China and India, who under the current structure have little to no influence in the IMF and World Bank. G-20, however, includes the most dynamic economies in world trade: China, India, Brazil, Mexico, South Korea and Indonesia. These nations are in the takeoff stage of economic development, but they have been denied an effective voice in formulating world economic policy.

The G-20 home page is: http://www.g-20.mre.gov.br/index.asp

Below is a list of the current members and a map of their distribution around the world:

Currently, the group consists of 23 nations:

• Argentina
• Bolivia
• Brazil
• Chile
• China
• Cuba
• Ecuador
• Egypt
• Guatemala
• India
• Indonesia
• Mexico
• Nigeria
• Pakistan
• Paraguay
• Peru
• Philippines
• South Africa
• Tanzania
• Thailand
• Uruguay
• Venezuela
• Zimbabwe

The group was established on August 20, 2003, at a meeting of the World Trade Organization in Cancun, Mexico. The twenty three members account for 60% of the world's population, and 26% of its agricultural exports. The group was initially founded as a vehicle for fighting tariffs on their agricultural products. They still stand today as they did then, for lowering barriers to international trade.

The pace of preparations for the upcoming London meeting is quickening. Last week the major Asian trading countries met to discuss ways to address their problems and to explore a common stance for London. The currencies of all the smaller nations have taken a beating, following the sharp reduction in their exports. China and Japan are also suffering from the global slowdown. China's rate of growth is slowing, and Japan's major exporting industries have suffered stiff cutbacks in production.

In Europe, the Euro members met last weekend in Berlin to discuss their problems and to hammer out a common strategy for the G-20 meeting. Their problems mirror those of Asia. The smaller, emerging markets of Eastern Europe have been hit especially hard by a fall in their exports to Western Europe and America. This has left their currencies battered to new lows. And, as with the emerging markets of Asia, the European emerging markets, such as Hungary, the Czech Republic, Latvia and Estonia, cannot get the bank loans they need to finance their foreign trade. The larger banks in western Germany, the U.K. and Switzerland are in such bad financial shape that they had to cut back on loans to emerging markets. This has resulted in a significant capital outflow from the vulnerable markets in the less developed parts of Europe, leaving them at a disadvantage in trying to weather the storm.

America's largest banks are enduring the same conditions. Their balance sheets are being propped up by a common consent to ignore the actual value of their bad loans and to carry them on their books at higher valuations than they deserve. If the largest banks were forced to liquidate these so-called assets, many of them would be technically bankrupt. This puts severe constraints on their ability to furnish adequate credit to their business clients, including those in emerging markets. The problem is, as has been said, systemic, and every major trading nation is desperately seeking to keep their major banks solvent. G-20 can go a long way in resolving the problems if a unified stance can be agreed upon.

The task facing the members is huge. They must agree on many things, most of which are contentious and complex. It is also exceptionally important that they find a way to work together if world trade is to be pulled out of the doldrums. Showdowns are expected in the following areas:

How can governance of the IMF be improved? China and India need to have more equitable voting rights (called quotas). China is now the third largest economy in the world, measured in dollars, but granting the Chinese more quotas will mean fewer for others. Who will accept the losses and the new arrangements?

How much should IMF funding be increased and who will furnish the capital? In times of crisis, the role of emergency allocations is crucial if disastrous devaluations are to be avoided. This crisis has tapped out IMF. The EU meeting is calling for $500 billion in additional funding. The ASEAN (Association of Southeast Asian Nations ) members and Latin America also need more availability for emergency currency loans. Who pays and how much?

How should the new international banking system be regulated? Should there be an international system, agreed upon by all members, or should each country settle on its own system? Should hedge funds and insurance companies be regulated, and if so, how?

How should the failing banks be “rescued?” Nationalization, partial ownership, temporary ownership, breakup, etc., are all on the table. European and Asian nations are more amenable to nationalizing their large banks than is America.

Can a world-wide system of coordination of fiscal stimulus plans be agreed upon? Germany, the last holdout on the need for its own stimulus spending, has finally come on board. With its own economy shrinking, Chancellor Angela Merkle, has joined the chorus. She now recognizes the need for not only German stimulus, but also recognizes the need to help some of the faltering Eastern European emerging markets through their tough patch. But, there are EEC regulations against member nations subsidizing trade of other members. Much work must be done on several fronts to bring this one off.

Should existing regional approaches to currency issues be maintained? At this moment, every region is approaching its own currency problems independently. Japan and China have agreed to support Asian emerging markets with emergency currency loans. Germany is close to agreeing to do the same thing with her sister nations in Eastern Europe. America has always stood ready to come to the emergency aid of her Latin American neighbors. Whether this implicit regional approach will yield to a more formal arrangement, under the auspices of the IMF and World Bank, is not clear.

The challenge for Mr. Obama is great, but he has had little time to prepare for it. His Secretary of the Treasury, Mr. Timothy Geithner, has been so engaged in formulating the bank bailout and a few hundred other urgent items, that he has not had the time to even staff his assistant secretary positions. I was encouraged when Mr. Obama mentioned the G-20 meeting during his address to a joint session of Congress this week. I hope he will be ready with an American plan in response to the Asian and European powers who are ready with theirs.

The London meeting has all the possibilities of beginning a new world order in international finance. Although the Washington emergency meeting was hailed by many reporters as “Bretton Woods, II,” that sobriquet was not deserved. It was a one-day meeting, and the American representative was George W. Bush, who was already looking for a house in Texas when he addressed it. His message was also completely counter to that of the overall sentiment of the other attendees. Everyone else saw that part of the problem of the financial collapse was lax regulation of the banking sector. Mr. Bush's speech phrased the problem as too much regulation--a common theme to which he has held throughout his Presidency.

The Washington meeting was successful in that the members did agree on an agenda for London, but it was not ready to be anointed Bretton Woods, II. The London meeting, however, may be up to the task, since much time and planning has been carried out since November, and a new American President is expected to be more willing to construct a more tightly regulated banking environment.

This will be Mr. Obama's first opportunity to make his presence felt on the world stage. The timing and circumstances of the meeting are beyond his ability to control, but that is the nature of a crisis. It will be a challenge for our new President to show world leaders where America stands. It will also be his challenge and opportunity to provide leadership on the way forward. The old order has broken down, and we need a new one to replace the original Bretton Woods agreement. If one can be found and implemented, perhaps it will pave the way for another half century of prosperity for the world economy, just as Bretton Woods did in its day in 1944.

Comments

[J. D. Swampfox:]

The writer says "...a new American President is expected to be more willing to construct a more tightly regulated banking environment." Heck, the US government owns the US banks de facto and soon, de juris (up to 80%, anyway). Controlling the banks means lending to whomever, however-much the government tells them to lend. So it will be "tightly regulated" alright...

The idea that Bretton Woods "paved the way for a half century of prosperity for the world economy is not sound. In fact, Bretton Woods never was given much of a chance. It lasted about 17 years. Quoting from Wikipedia (I added the Caps), it called for "each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—IN TERMS OF GOLD". The United States unilaterally terminated convertibility of dollars to gold, which caused "considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" for the states which had signed the agreement."

The US government was highly disposed toward inflation in 1971 and removed the last obstacle gold. If it had not abrogated Bretton Woods, we probably would not be in the mess we are in now. The old order that the writer says has broken down is based on monetary and debt inflation and the US was and is the leader of that order. If there is a new order agreed upon, will it involve a return to the original intent of Bretton Woods? If so, the new American President will not lead it, since he will will never give up that much control. It would limit his ability to facilitate monetary and debt inflation to pay for social programs.

(see en.wikipedia.org/wiki/...)

Feb 28 09:29 PM

[Ray Hendon:]

I suggest a wider reading of the state of the world economy after WWII and the role Bretton Woods played in helping re-establish it. And, like it or not, it was the last system we had and still have, until now.

The IMF and the World Bank, both came out of Bretton Woods, and they have served their purposes well, and their role will probably be expanded after the G-20 meeting.

I also suggest a closer study of the capability of a gold standard with regard to world liquidity needs. Inflation occurred long before gold was a backing for currency, and the huge price fluctuations generated by gold discoveries over history is a testament of how horrid the system was. We got off of it for very good reason, and world trade has flourished as never before.

Inflation is the result of political and economic decisions made by our monetary authorities. Sometimes they are well intentioned, and sometimes not. But living in the straight jacket of gold would be much worse for world trade. Romanticism is never an answer to problems, it is only an irrational wish to have things be better by having some magical wand to wave. Gold is not magic, and waving it around will not solve any of the world monetary problems we have now or ever will have.

Best wishes,

Ray

Mar 01 12:31 AM