November 13, 2008
This weekend's gathering in Washington of the G-20 industrial and developing economies, billed by some as the second coming of the historic Bretton Woods conference, seems likely to produce more modest ends. Bretton Woods came after years of preparation and five years of world war; it created a global economic order more or less from scratch, establishing the International Monetary Fund (IMF) and the World Bank. The G-20 summit comes after less than a month of planning and won't involve finance ministers, whom analysts say would be needed for any broad new framework to be crafted. The most likely outcome, reports the Financial Times, will be general agreements about coordinating fiscal stimuli--not insignificant, but hardly an overhaul of the global financial order.
All the same, analysts will watch the summit for signs of possible regulation to come, and to gauge the mood of the world's leading policymakers at a time of economic distress. Over the course of 2008, the global economy has seen wild swings in equity and commodity prices, currency upheavals, and severe credit market turmoil, events detailed in a new CFR.org timeline. In the United States, the private investment bank model, which served as a driving force behind the financial successes of recent decades, eroded completely. Firms like Goldman Sachs and Morgan Stanley, riddled by financial uncertainty, voluntarily subjected themselves to greater oversight in exchange for access to short-term loans from the U.S. government. Washington also greatly expanded its own financial burdens, nationalizing the mortgage guarantors Fannie Mae and Freddie Mac and establishing pools of money to backstop struggling financial institutions.
Other countries and international institutions made similarly sweeping moves. British Prime Minister Gordon Brown, French President Nicolas Sarkozy, and other European leaders agreed to make large sums of money available (Economist) for recapitalizing banks--and possibly taking equity stakes in them as well. China, for its part, announced a $586 billion stimulus package that CFR's Elizabeth Economy and Adam Segal write sends a clear signal that Beijing is redoubling its focus on economic growth. The World Bank and IMF have both expanded (Guardian) the amount of money available to smaller countries that find themselves in financial distress, though some countries, including Argentina and Pakistan, hesitated to take this money even when they found themselves on the brink of loan defaults. And dozens of countries, spanning every inhabited continent, have staged some form of economic intervention, from guaranteeing bank deposits to banning short sales of equities to adjusting the interest rates at which they lend money to banks. An interactive graphic from the Financial Times surveys the scope of these interventions.
The question now is whether the G-20 meetings will lead to more global coordination. The most important point, said panelists at a recent meeting cohosted by CFR, the Economist, and NYU's Stern Business School, is to provide a safety net for firms that are "too big to fail"--those whose collapse poses such a risk to the global economic order that it is worth the cost to taxpayers to keep them afloat. The panelists said this list should include any firm with a balance sheet tallying more than $1 trillion, and a handful of other companies of systemic importance (such as those that manage so many financial contracts that by collapsing they could bring down larger firms). Still, all three panelists noted the risk of regulatory overreach--a point echoed in a Washington Post op-ed by C. Fred Bergsten, the director of the Peterson Institute for International Economics. Bergsten also issues a more direct warning about the G-20 summit. Should conflicts emerge over regulation, he writes, the summit could undermine confidence, mitigate regulatory gains made to date, and send markets "into a new tailspin."
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