♠ Posted by Emmanuel in Credit Crisis,Economic Diplomacy
at 11/16/2008 03:07:00 PM
If you've read the previous post, you know that I was not expecting a wide-ranging rethink of the international economic order. As with many of these gatherings, the most tangible outcome was, er, holding another gathering in the near future (more specifically, "by April 30, 2009"). It was, to my mind, pretty much wasted time--except for those whose main interest is in preserving the status quo. Which, as I've suggested, is the Bushian BATNA in negotiation-speak. Reading the G-20 Summit Declaration is instructive. Just as Bush did before going into the summit, we get the usual affirmation of the virtues of free market capitalism:Our work will be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.So far, so what. We don't expect a Hugo Chavez-style denunciation of capitalism's follies at a White House-hosted economic summit. Moving right along, Bush's unwillingness to even entertain the idea of a global overseer--with teeth--tells you pretty much all you need to know about the futility of this meeting. Bush's desire for a regulatory hodgepodge--DIY at a global level--is again reflected here:
Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability.Trade watchers will also note the sop to the completion of the Doha Round. Will this lend the required momentum to finally get it done?
Further, we shall strive to reach agreement this year on modalities [pertaining to tariff reductions] 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. We also agree that our countries have the largest stake in the global trading system and therefore each must make the positive contributions necessary to achieve such an outcome.The "Action Plan" section is fairly detailed and in some places quite ambitious. There are short-term objectives which are supposed to be met by the end of March 2009 as well as medium-term ones. First, in contrast to the DIY approach to financial regulation, there is a strong call for eventually standardizing global accounting practices, especially for "complex, illiquid products" as well as disclosing off-balance sheet vehicles. Will these measures help stave off future LJMs (Enron) and Granites (Northern Rock)? I sure hope so. If you're a cynic like me, however, American accounting firms which are still in the forefront of the trade can benefit as reporting requirements for derivatives and suchlike are ratcheted upwards. Unlike with a global financial overseer, there is a clear plus for America here.
There is the usual talk of shaping up credit rating agencies. The Asian crisis and the current implosion of the securitization bubble give me reason to pause as to whether these agencies can be nudged in the direction of aligning business incentives with properly assessing creditworthiness. It is mentioned:
Regulators should take steps to ensure that credit rating agencies meet the highest standards of the international organization of securities regulators [are they referring to IOSCO?] and that they avoid conflicts of interest [yes, they should do away with paid-for ratings], provide greater disclosure to investors and to issuers, and differentiate ratings for complex products. This will help ensure that credit rating agencies have the right incentives and appropriate oversight to enable them to perform their important role in providing unbiased information and assessments to markets. The international organization of securities regulators should review credit rating agencies' adoption of the standards and mechanisms for monitoring compliance.Next, there is mention of improving risk management practices in the near future. With so much unsettled, I hardly think that suggestions such as "[s]upervisors should ensure that financial firms develop processes that provide for timely and comprehensive measurement of risk concentrations and large counterparty risk positions across products and geographies" are feasible by March 31, 2009. Not only are "risk positions" hard to ascertain at the moment given several examples of market seizure, but developing risk measures post-Basel will take time to be ironed out given a fluid situation.
As mentioned in the earlier post, a medium-term objective is greater LDC participation in IFIs, although developing countries may be somewhat wary of this responsibility as they will be made to ante up more emergency funding as more countries run into balance of payments problems:
We underscored that the Bretton Woods Institutions [the IMF and World Bank] must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges. Emerging and developing economies should have greater voice and representation in these institutions.Greater communication, cooperation, and coordination--these are staples of summit texts. If I can sum up what was agreed to, it's to "enhance transparency." What troubles me is that markets can be reasonably transparent and yet will to take concrete action absent when it becomes evident that things are going awry. The housing bubble was plenty apparent to many, yet there was nothing done at either the national (US) or international level to take corrective measures in good time. Leaving it up to countries to enhance their regulatory apparatus the way they see fit seems like a punt on meaningfully adressing the current crisis. In the sense of evading a most important issue, the G-20 didn't matter. And, as I've suggested, it's probably by design. Same old, same old.
