What Should the New G20 Agenda Be?

The new consensus on international imbalance monitoring and surveillance reduces the problems associated with implementing effective development and growth strategies in the face of several political and economic constraints to a problem of imbalances that can be solved by minor adjustments. These adjustments include achieving greater transparency; less regulatory arbitrage among lax structures; and changes in distortions like removing soft-pegged exchange rates and reducing fiscal and trade deficits. However, the political and economic constraints economic administrators face include negotiating strategies in the context of the economic hegemony of the neoliberal growth model and its promotion of the export-orientation of developing nations. This response invokes the old neoliberal model without recognizing its failure at the country level and thus it is unlikely to succeed, even in a revised form, with tremendous global cooperation. The neoliberal model must change and the policies that follow must be coordinated to effectively get us out of this global recession and onto a sustainable, more equitable growth path.

National financial ministers and the international financial institutions haven’t even agreed that the development of structured investment vehicles (SIVs) and conduits which were not robust enough to withstand changes in credit ratings and interest rates spreads were problematic. Nor have they been able to agree that the great articulation of the securitization markets that followed these innovations was an overgrowth that must be systematically scaled down, particularly by modifying home mortgages. The IMF’s latest Global Financial Stability Report [1] laments how far we need to go to resuscitate securitization markets, as if that were desirable. And while Barney Frank and others can be commended for resuscitating the cram down legislation [2] it still remains unpopular with the well-funded financial community.

The new G-20 consensus involves the same neoliberal themes embodying neoclassical assumptions and New Keynesian amendments, including the view that transparency can solve all problems associated with asymmetric information in credit ratings and overextension of risk. It is the same kind of assumption holds that labels on packs of cigarettes will stop the spread of cancer. There is no fundamental critique of capitalism.

There is the recognition of inequity. There is the understanding that the status quo represents the interests of the winners of the game who are few while the losers are many. This is expressed through the push by heads of state, appealing to populist sentiment, to impose stringent executive compensation standards and, more radically in the US, to standardize the incentive structures for all employees at financial institutions proposed by the Fed. There have even been calls in the UK and Europe [3] for financial trades to be taxed to slow down speculative gains and to stifle destabilizing sell-offs echoing calls from progressives in the US [4]. These recommendations acknowledge pure, short-term profit maximization (or maximizing shareholder return for public companies), which is at the heart of capitalism, is inherently destabilizing and leads to intolerable inequities as well as inefficiencies. This is a start, but judging by the backlash these modest proposals have received, implementing even more comprehensive redistribution plans and disempowering the financial sector are far from being on the table given the political capital of the elite who have benefited and will continue to benefit from both the upswings and downswings inherent to capitalism. When proposals are put forth--like allowing a scaled-down vanilla version of the financial sector to exist in return for counter-cyclical mechanisms for gains to be shared more equitably during the booms and for losses during contractions to be borne by those at the top of the income ladder--you know we will have had a shift in our system toward democracy.

The reforms currently on the table are largely Band-Aids. The calls for greater capital adequacy provisions seem to hope that extra padding—wearing elbow pads—would somehow be sufficient to prevent massive coronary attacks. The call for greater provisions to the IMF can be seen as desperation, the collection plate circulating to pay for the funeral, not a real solution unwind bad debt justly. The call for the IMF to make minimal increases to special drawing rights (SDRs) can only be seen as a down-payment on more fundamental reforms to address currency realignment. This would entail promoting continuous, equitable exchange rate coordination.

Although Zhou Xiaouchuan, Governor of the People's Bank of China has discussed the role of pro-cyclicality in precipitating and extending crisis [5], there is less discussion about what countercyclical mechanisms can exist without changing our current development model. The neoliberal mantra has been liberalize and prosper (and at times, liberalize or else). Nations that liberalize their financial markets are recommended to accumulate savings in lieu of implementing capital controls or gradually and partially liberalizing. They are told, even still, to accumulate savings in ways that do not promote distortions, (presumably through foreign reserves gained namely through export sales producing net foreign asset surpluses). Thus, their imbalances cannot be leveraged without structurally changing their circuits of production and investment which does not happen automatically when prices, i.e. relative exchange rates, change. This was historically demonstrated after the devaluation of the US dollar relative to the yen failed to change the structural imbalances with Japan, after the Plaza Accord was enacted in 1985. Currently, however, large fiscal deficits in importing nations used to pay for structural changes are discouraged (by lenders, the IMF, credit rating agencies and fiscal conservatives) while use of foreign reserves in developing nations is encouraged to boost consumption (by the G7 nations and the IMF). However, in these developing nations GDP is being derived from export sales and domestic markets are well developed, meaning increased domestic consumption will not automatically increase imports. Thus, offloading a significant amount of foreign held reserves could destabilize the reserve currency while if “effective” could cause the trade deficit to be skewed in another unsustainable direction, promoting stagnation and deflation. The fallacy of composition is operating in this line of thought. What is needed is more policy space for fiscal policy in industrialized nations to sponsor structural shifts. This should be paired with more lenience for developing nations to pursue expansionary fiscal and monetary policy as well as employ any and all necessary protections.

Protectionism perceived to be anathema to all. In crisis, especially, it is actually the knee-jerk reaction of a state to identify its best interests and to insulate those interests against complete annihilation. However, insofar as this conflicts with what other nations have identified as their best interests, we have a coordination problem, but importantly, not an essential problem with protectionism itself. What, in fact, we need is not only the ability of nations, developing and industrialized alike, to be permitted and emboldened to pursue industrial policy and implement economic plans; these need to be coordinated in an equitable international forum to ensure those nations with most vulnerabilities, requiring the most investment and protection are treated differently than wealthy nations and those with tremendous resource wealth and diversified export potentials. Full employment at equitable wages in all economies should be the overarching goal of this coordination experiment. This would require preempting two decades of multilateral and bilateral trade agreements and dismantling the liberalization and deregulation foundational tenets of the WTO but the coordination would be well-suited to function under the current WTO structure.

The industrialized nations have emboldened the IMF and made hundreds of billions in new commitments while the IMF now maintains developing nations, if well qualified, can run deficits not much larger than 2% GDP. The IMF was created to assist countries who would otherwise not be qualified for credit to avoid running deficits by borrowing a sufficient amount from the IMF, not to bail out failing banks either, so this concession is ironic, even if it’s the most generous the IMF has ever been on deficits for developing nations. The IMF still opposes the use of capital controls even as crisis and speculation are predicated on uncontrollable flows pouring in and out of an economy. There has been no recognition by the G8 or the IMF itself that the IMF’s recommendations for liberalization, deregulation and structural adjustment have failed; large checks are just being passed out. This is a bailout at the international level for those destabilizing the economies of developing nations; it’s a socialization of losses transferring the risk of the private sector to the tax payers in developing nations (let’s keep in mind these are loans with interest). So much for institutional accountability and a regime change away from free market capitalism.

What do good people think about this? See a sound list of demands here [6].

Americans’ for Financial Reform’s G-20 agenda includes:

• The IMF allowing countries with stand by arrangements to have flexibility to expand healthcare and education spending. They recommend the Fund give countries more macroeconomic flexibility in fiscal and monetary policy, including the use of capital controls and that the Fund prohibit the inclusion of financial deregulation as a condition of funding or a policy recommendation. They also endorse expanded debt cancellation, free from harmful conditionalities.
• Abandoning the terms of the WTO’s 1999 Financial Service Agreement (FSA) imposing financial deregulation on all nations regardless of their domestic laws.
• Supporting efforts to eliminate tax havens and regulate shadow banking, (hedge funds, private equity funds, derivatives and off balance sheet activity) by setting minimal regulatory standards agreed to by the nations of the G-20 in consultation with international bodies such as the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB).
• Moving from antagonistic trade relations under unrealistic and counter-productive agreements to cooperation and leniency.
• Independence of financial regulatory bodies from the finance industry.

William White, head of the monetary and economic department at the Bank for International Settlements suggests [7] taking a hard look at the monetary policy environment that feeds bubbles (less the current en vogue explanation that savings gluts in surplus nations were the cause of the global financial crisis) and warns of problems in executing fiscal stimulus programs in industrialized nations without coordinated planning to address structural issues.

Philip Augar, a former investment banker and the author of Chasing Alpha, and John McFall, chairman of the Commons Treasury committee recommend [8] breaking up the banks and re-imposing a more aggressive Glass-Steagall and scaling back the financial sector:

Taken together, these reforms would represent a wise shift toward financial stability and provide the policy tools necessary for nations to develop domestic and international strategies to achieve stable growth. Doing so requires a tremendous amount of advocacy because it requires confronting organized capital and dismantling the ideology of free market capitalism that pacified our better judgment as inequities grew around us. Watch this website [9] for more details on how you can help fight the fight.