The G-20 meeting did not result in any substantive steps being taken, but it helped raise confidence levels.
With not much room left for monetary easing or fiscal stimuli, one wonders whether the G-20 Summit meeting early this month indulged more in the game of managing expectations than taking substantive steps. If so, they seem to have achieved some success. Stock (and junk bond) prices have gone up in most world markets since the conference. Prices of (non-mortgage) Asset-Backed Securities (ABS) seem to have stabilised and fresh issues of corporate bonds are taking place. Copper and other commodity prices have started looking up. Is this a ‘tipping point’ as much as the Lehman Brothers bankruptcy was in September last year? Overall, it is probably better not to be too optimistic about the state of the global economy!
Prime Minister Gordon Brown, the host, is obviously pleased — the conference has succeeded far more as compared to the fiasco of the Economic Conference held in London back in 1933 in similar circumstances. No wonder Brown hyped the $1.1 trillion committed in the conference through the International Monetary Fund (IMF) and the multilateral banks, to help global recovery. It seems to consist in equal parts of hopeful expectations, some existing commitments, and some double- counting. Arvind Subramanian of Johns Hopkins University (and earlier of the IMF) described the number as a ‘spin’. Be that as it may, the result is much better than what was feared earlier: A confrontation between the US/UK who were emphasising the need for a fiscal stimulus and France/Germany who were insisting on tighter regulation, not further fiscal deficits. (Even the Bank of England governor has cautioned against further opening of the fiscal/monetary taps and the inflationary pressures these could result in when economic recovery begins.) At one time, France had threatened to walk out of the conference if it did not get what it wanted. This divergence in objectives manifests the difference between the Anglo Saxon economies on the one hand, and France and Germany on the other. The latter do not need the stimulus so much because their unemployed are far better protected: In contrast, hundreds of thousands of unemployed in the US will start running out of unemployment benefits, which are limited to 59 weeks, over the coming months.
The IMF is suddenly back in the business of balance of payments assistance after several years of drought. With the reversal of capital inflows to many developing and emerging markets, some of them are badly in need of balance of payments support: Countries in east and central Europe alone may need new financing of the order of roughly $500 billion which is the total of their current account deficits and maturing debt obligations in the current year. Many African countries are also in a bad shape thanks both to a reversal of capital inflows, and the lower commodity prices on which so many of them rely to balance their trade and capital accounts. Whether the IMF will actually get the extra $500 billion of resources, most of it through bilateral borrowings from reserve surplus countries, is still not clear. The US commitment of $100 billion is subject to Congressional consent and China may well link its contribution, directly or indirectly, to a substantial increase in its quota — which, of course, its economic size and strength warrant.
The G-20 also committed itself to tighter regulation of financial markets and players, including hedge funds. The biggest hurdle to tighter regulation of financial services is the revolving door between Wall Street and the policymakers in Washington. Crony capitalism is alive and flourishing in the US. Too many treasury secretaries have been imported directly from the investment banks (Rubin, Paulson), or were otherwise close to them (Geithner, the New York Fed governor). Lawrence Summers, the senior-most economic advisor of the President, earned millions in advisory fees from hedge funds before joining the White House. How much heart will such people have in tighter regulation of their erstwhile paymasters? Is the incestuous relationship between the banks and senior officials the reason why the rescue plan continues the policy of privatising profits and socialising losses?
A major issue of concern, not discussed by the G-20, at least openly, is the status of the dollar as a reserve currency. The imbalance in trade, particularly between US and China, and the huge exposure of China to dollar securities (see World Money, March 30, 2009) are serious issues with the potential to destabilise the global economy: What is needed probably is some very intense if quiet talks between the G-2 — the US and China. Are they already taking place? In the meantime, the proposed issue of SDRs equal to $250 billion, even if it takes place, would do little to enhance the roll of SDRs as a reserve currency. First, much of the issue would go to the rich countries. Second, those wanting to convert the allocation into usable resources would need the IMF to arrange for a surplus country to buy the SDRs against one of the major currencies.
