The London Summit: Bold Re-Think or Small Steps?

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The London Summit takes place on April 2nd. While this will mark Barack Obama’s first global summit as president of the United States, the meeting hasn’t received much attention in the US – in sharp contrast to much of the rest of the world, which is highly focused on the event and collectively hopeful that it will result in some dramatic fix for the global economic crisis.
This meeting was scheduled back in November, 2008 as a follow up to the Washington meeting of the G-20. At that time, President Obama had just been elected, the Bush Administration was packing its boxes and the thinking was that quirks of the US electoral calendar prevented any real US-led initiatives from being considered. So, in spite of calls in the run up to that event for a “new Bretton Woods”, the failure to deliver on such high expectations was largely forgiven by those who put their hopes on the next meeting, by which point President Obama would certainly have the situation well in hand.
By scheduling another meeting for April, the thinking was that the new administration would be in place, and the working groups established in November could provide background assessments and analysis so that the world would be ready to embrace new thinking and bold solutions. Well, that time is upon us. Sadly, the “shameful” (Paul Volcker’s words – not mine) situation at Treasury, where almost none of Secretary Geithner’s senior political positions have been filled, means that it appears unlikely that last November’s high expectations for bold action will be met.
What I fear most is the drip, drip, drip of incremental fixes when something more structural may be needed. Some of the world’s most brilliant financial and policy minds have all written that we need big, new initiatives to take on the financial crisis. Business as usual just isn’t enough. Martin Wolf, Nouriel Roubini, Simon Johnson, George Soros… the list goes on. They have all looked beyond the trees and seen the global financial forest and have suggested the need for a structural re-think about how our banking and non-banking financial system works. Whether this makes it to the London Summit agenda remains to be seen.
I still hope that the summit will be a place where bold action by the US and other attendees is announced. However, I worry that the summit will, in the end, fail to announce the tangible steps that the global financial system needs and that world markets are looking for.
In particular, I am focused on the working groups established for this summit which have been tasked with exploring a re-think of how the global financial sector operates.
I don’t know what these groups will propose, but I am hopeful that they call for a deeper exploration of how “risk” is integrated into the global financial system. Risk is the cornerstone of Anglo-Saxon style capitalism, but how it is treated is one of the most misunderstood aspects of what is at the very core of needed reforms.
As governments play an increasingly large role in the global financial system, I believe that it is imperative that those proposing reforms consider the fundamental differences between those who approach risk as lawyers, politicians and policy-makers, to whom, in general, risk is something to be avoided and/or mitigated and those in the financial sector who believe that risk is something to be valued and managed. That distinction is of enormous consequence. Any proposals to reform the global financial system must take into account these fundamentally different approaches to risk.
This may ultimately result in a bifurcated financial system in which the more risk averse are drawn to a more traditional utility banking model (remember the phrase “boring bankers”?), and where the systemic nature of the banking sector makes them worthy of government intervention and taxpayer support. Those entities that seek to take on more sophisticated financial sector activities, wherein risk is valued and managed, would be excluded from the utility banking sector and would fall into a non-bank financial services sector. As proposed in the G-30 report led by Paul Volcker earlier this year, there are a number of different proposals to ensure that this sector is regulated on a globally coordinated basis to ensure that innovation is not destroyed but so that systemic threats are kept under control.
The agenda for the London Summit is long and expectations need to be managed. But financial markets have a notoriously short attention span – and the political process both in Washington and internationally doesn’t easily operate on a similar time frame. I hope that the US steps up and takes bold leadership at the April summit and that tangible steps to re-shape the global financial system are announced at that time – steps that provide comfort to those around the world, many of whom both resent the US for exporting an economic model that has caused so much dislocation and are also hopeful that we can lead the way out.
— Douglas Rediker

Comments

7 comments on “The London Summit: Bold Re-Think or Small Steps?

  1. erichwwk says:

    Nice post Douglas Redicker, and kudos for raising two key issues:
    1) Separation of the utility function of banks from their speculative aspects. To meld these two, and force the public to pick up losses while the upside accrues to the few crosses the line in a governmental system worth preserving. To many of us, this policy was NOT some accidental collateral damage, but done with full knowledge of the consequences. No reason to do this EXCEPT for the possibility to profit from shifting costs.
    2) All the above point to a property right and incentive structure that is unsustainable. What is indeed needed is a paradigm switch, NOT some minor tweaking.
    And a third issue, somewhat related to the differing views of risk between entrepreneur and politician, is the role the US dollar plays as the global currency, and the power the US yields in global monetary institutions. The extent to which global investment can take place is a function of how contracts that do not settle in time or place will be honored. I suspect much of the April 2 forum will focus on that, in relation to 1 and 2 above. Other governments may feel blackmailed and held hostage in the same way the American citizen feels unempowered in having its interests represented.
    I’ll have to read the Volcker report again, more carefully. But while many, as you note, share these two concerns I did not find the Volker report, at first read, as clear on these two issues as you imply. Eg, I find the “too big too fail” problem addressed only by an incentive and regulation restructure. “Too big” to fail must also be addressed by keeping firms small enough, for long enough. The report seems unwilling to tackle the “too big to exist” issue. The one arising from asymmetrical information between the contracting parties, the fact that “bigger always wins- captures wealth” when push comes to shove in disputes between unequal parties. This MUST be considered in a post crisis world. The NYT has a good article on this, citing David Akerlof, whose 1970 paper on “the Market for Lemons” is the classic in asymmetrical information and contracts, for which he won the 2001 Nobel:
    http://tinyurl.com/bsenfn
    Also nowhere (at first glance) do I find clawback covered, although it appears the report dismissal is justified on the basis of it being a “nationalistic, pre-stability issue, the type they are unwilling to consider. Perhaps they can find a way to at least it as a rule for the future, whatever they are calling preemptive macro policies these days.
    I hope that you will periodically post updates, with links to papers you find most important.
    I do find Bernanke’s statements yesterday encouraging. To those wanting “more, faster” you have my empathy. But we must recognize how understaffed Treasury is, and the magnitude of the effort required to implement major structural changes, a get public staffing up to the task. And above all, the fact that the structural changes required to separate “real risk” from “ownership risk” and “political favoritism risk” and does turn that effort into the sort of “class struggle” that generally makes rational discussion and policy change extremely difficult. Wasn’t the shift from equities to investment bank securitization of risk an effort to obfuscate, to keep out of public view, the extent to which risk was being shifted to the public without their knowledge or consent?
    While these “new rules” may be seen as optimal by all in the sense of maximum growth and real output, “a bird in the hand is worth two in the bush”. Those coming out on top under the current arrangement are generally reluctant to “let go” and take the chance that “their” position will be maintained under major change. Even though slavery is a suboptimal social labor contract, let’s not forget that to change that contract required the most loss of US life of any “structural change” in US history. While it may seem obvious that maximizing US or global public cost-benefit ratio should be a goal, this may NOT be identical to the private cost-benefit ratio of the elite, if the elite decision makers fear that the new structure will not maintain their advantage, and opens the door to a major new income and wealth sharing paradigm.
    I’d be interested in knowing the extent to which this sort of ”class struggle” issue is on the table in London, going forward if not restorative.

    Reply

  2. James West says:

    The Liberal Democrats in Britain (the party offering actual solutions, as opposed to Labour tinkering & tory soundbites) last weekend proposed the same. An extract from Nick Clegg’s speech to conference:
    “What makes the Liberal Democrats even more distinctive is our vision for a different banking system altogether.
    I want a return to old-style high street banks so people’s savings are protected from the big risks of investment banking.
    I propose that banks are given a choice.
    You can do ordinary consumer business like current accounts, mortgages, business loans, savings.
    We will protect you and your customers’ money if things go wrong.
    But in return, we will regulate you like a hawk, and insist you never do anything risky.
    Or, you can take the high risk route, playing the markets to get big returns.
    We’ll allow you to take those risks as long as you don’t get involved in high street services.
    But if things go wrong, don’t come begging.”

    Reply

  3. alger hiss says:

    they dont want us in their lands pure and simple.
    much like the american revolutaionaries didnt want the british trying to enforce foreign law on them.
    what is so difficult to understand about that?
    there is no pr campaign that would sell the b.s that americans here in the state dept believe about themselves and their empire effectively because the pakis or afghanis can see right through the b.s….what the hell business do we have over there anyways …if we believe in free mkt capitalism then we ought to bid for whatever resources we want to buy on the open mkt.
    americans need to stop talking out of both sides of their mouths when it comes to capitalism and forced colonization of other nations resources.
    there is no effective intelligence agency in america…the only intelligence operation that the cia has ever done effectively is the nations press and the news it disseminates….and that operation is against us..we the people.
    do you really believe that the muslims knocked down tower seven of the world trade center…
    they must be magicians.

    Reply

  4. Gary says:

    See, that’s the difference between the American press and the world press. Foreign policy issues are way down on the list of things to talk about. Seems like the press here get very bored when foreign matters come up. The rest of the world keeps up to date on world events, especially where the US is involved.
    The disconnect is very apparent.

    Reply

  5. kathleen G says:

    Have you read Charles Freeman’s statement about why he pulled out?
    Message from Charles Freeman
    “The libels on me and their easily traceable email trails show conclusively that there is a powerful lobby determined to prevent any view other than its own from being aired, still less to factor in American understanding of trends and events in the Middle East. The tactics of the Israel Lobby plumb the depths of dishonor and indecency and include character assassination, selective misquotation, the willful distortion of the record, the fabrication of falsehoods, and an utter disregard for the truth. The aim of this Lobby is control of the policy process through the exercise of a veto over the appointment of people who dispute the wisdom of its views, the substitution of political correctness for analysis, and the exclusion of any and all options for decision by Americans and our government other than those that it favors.”
    http://online.wsj.com/article/SB123672847973688515.html?mod=googlenews_wsj

    Reply

  6. ... says:

    the federal reserve now appears to want to get out in front of the curve on all of this… why now and not much earlier when they could see an approaching train wreck??
    from a speech earlier today
    Bernanke Says Financial Rules Need an Overhaul
    http://www.nytimes.com/2009/03/11/business/economy/11fed.html

    Reply

  7. Dan Kervick says:

    We have a new president; but that president has inherited a political culture built during eight years of unilateralism, introversion, xenophobia and intense nationalism. Getting Americans to pay attention to global affairs is still an uphill struggle.
    There is also an emotional aversion here to the message that we are in a global crisis. To acknowledge that fact means to acknowledge that our capacity to control our destiny is limited to the extent that it relies on domestic action alone.

    Reply

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