US opposes European calls for financial regulation
November 11, 2008
By Simon Kennedy and Michael McKee
This week's economic crisis summit will pit US and Canadian support for free markets against European demands for greater state control. In the middle will be developing nations that hold increasing sway over the global economy and don't want the trade-off between regulation and economic growth to come at their expense.
Leaders of the Group of 20 (G20) industrial and emerging countries, meeting from Friday in Washington, will consider steps ranging from raising capital standards for banks to regulating hedge funds. Their goal: to prevent a repeat of the irresponsible risk taking that has led to the erosion of credit.
"Necessity is the mother of invention, and there's a real necessity now for more regulation," says former US treasury secretary John Snow.
The hard part is figuring out how much growth leaders are willing to sacrifice in exchange for greater economic security.
"Whatever changes are made will be long-standing, so policy makers must be careful to make sure they are a net positive overall," says Tim Adams, the managing director of the Lindsey Group, an economic advisory firm in Washington.
The G20 leaders will focus squarely on banks and investment houses that ignored evidence they were miscalculating risk, lent to unqualified borrowers and relied too much on derivatives like credit default swaps, which function as insurance for bondholders, to protect against losses.
At weekend talks in Sao Paulo, G20 finance ministers and central bankers blamed "excessive risk taking and faulty risk management practices in financial markets" for starting the crisis, while acknowledging "deficiencies in financial regulation and supervision in some advanced countries". The officials said they were prepared to act "urgently" to bolster growth.
So far banks have had to write off about $691 billion (nearly R7 trillion) in bad assets, creating a global credit crunch as they suddenly shut down lending, wary of losses.
The International Monetary Fund (IMF) last week predicted that the economies of the US, Japan and the euro zone would simultaneously contract next year for the first time since World War 2.
While many analysts predict a regulatory backlash, there is little agreement on what kind of oversight, or how much, would be needed to prevent another crisis.
President Nicolas Sarkozy of France, who pushed US President George W Bush into convening the summit, is calling for increasing government control - across borders - on lending practices and investing.
"We don't want to move from an absence of regulation to too much regulation, but we want to change the rules of the game," Sarkozy said in Brussels on Friday after European leaders finalised their proposals for the summit. He demanded that the Washington talks deliver "ambitious, operational decisions".
The Brussels meeting concluded with calls for stiffer regulation of credit rating agencies and hedge funds, and urged a crackdown on risk taking and executive pay.
Sarkozy has support from Chancellor Angela Merkel of Germany, who seeks hedge fund regulation and curbs on bonuses for bankers as part of a new "constitution" governing financial markets.
UK Prime Minister Gordon Brown has lobbied for improving cross-border oversight by placing the world's top 30 banks under the supervision of a regulatory panel.
Such ideas will find little favour with the Bush administration. With little more than two months left before Barack Obama takes office, it has signalled it opposes a global authority overseeing financial markets.
While European leaders have called for a "new Bretton Woods" - a reference to the 1944 conference that established the post-World War 2 global economic system - Canadian finance minister Jim Flaherty cautions against overreaching.
"We don't need to recreate the world right now," he said late last month.
Charles Calomiris, a professor at Columbia University, notes that most major banks already subscribe to the Basel accords, developed in 1988 and 2004 to create international standards for regulation, risk management and disclosure - and those failed to prevent the crisis.
"We don't want more co-operation," Calomiris says. "We just want to regulate our banks more effectively."
Willem Buiter, a professor at the London School of Economics, says subjecting financial institutions to more checks would rebuild confidence among investors. "If it's done well, we can get greater stability. The risk is of doing too little."
There is a risk of going too far, too, with regulation that stifles innovation and raises costs. Requiring banks to hold more capital would reduce the money available to lend.
Joachim Fels, the co-chief economist at Morgan Stanley in London, says tighter regulation is one reason that "potential growth is likely to be very subdued and substantially lower than in the past decade".
That is a concern for developing nations, which benefit when industrialised countries grow and buy their products.
"The prospect of regulation slowing a return to trend growth, and so hurting exports, is a worry," says Tim Condon, the head of Asia research at ING Groep in Singapore. As for imposing tougher rules at home, countries such as China will want to maintain "regulatory forbearance and flexibility as their economies slow", he says.
So far, the Chinese aren't taking sides. After meeting with European leaders on October 24, President Hu Jintao, who will attend the summit, said his country "must first and foremost run our own affairs well". Premier Wen Jiabao said that while more oversight might be required, "we need to handle correctly the relationship between financial innovation and regulation".
The Chinese are acting in other ways to gird their economy. Beijing has unveiled a 4 trillion yuan (about R6 trillion) plan to sustain growth. China's cabinet pledged "fast and heavy-handed investment" in housing and infrastructure through 2010.
Glenn Maguire, Societe Generale's chief Asia economist, says most leaders of emerging nations see little reason for stricter rules because their banks did not make the same lending mistakes as Western rivals.
That, along with increased economic power, may give emerging countries more influence over the regulatory response, he says. "Whatever the solution to the crisis is, they are going to have a significant role."
Brazil's President Luiz Inacio Lula da Silva said at the weekend: "This is a global crisis and demands global solutions." The Group of Seven rich nations "alone is not in condition to conduct the world economy. The participation of the developing world is essential."
Jeffrey Sachs, the director of Columbia University's Earth Institute, says regulation should take a back seat to helping countries navigate the economic crisis. Developed nations could use the IMF or their own central banks to help provide safety nets for banks, he says.
"We need financial institutions that make sense for the challenges we're facing, not just an effort to fight the last war, which is what financial regulation would do," Sachs maintains.
Given the divided goals - and the timing - this weekend's meeting is mostly a chance for the Europeans to make their case and for officials to agree to meet again next year, with Obama in the White House.
The summit is not likely to be much more than the beginning of a debate - let alone a modern version of Bretton Woods.
"This will be long term," says Michele Fratianni, an economics professor at Italy's Università Politecnica delle Marche. "When you start talking about fixing things, with so many countries having different objectives, this will take some time."
|
|
