G-20: On a Wing and a Prayer

In this season of our discontents we long for signs that astute, reliable people are taking charge of at least one problem that is bedeviling us. The G-20 summit this week has raised hope in some quarters that the worlds' leaders are finally coming to grips with the root causes of the financial meltdown that brought us to the brink of collapse and has left the global economy in tatters. Serious reforms could inspire confidence that responsible authorities are back in charge. An outcome that is heavy on cosmetics and thin on substance, by contrast, will add to feelings of unease and anxiety. The dismaying reality is that the outlook is for an emphasis on the superficial to mask collective inaction on the basics of a badly flawed system that threatens future seismic shocks. Here is why we are likely to be disappointed by what happens in Pittsburgh.

Most of the talk will be about bank capital requirements and global rules on bonuses. Neither addresses core issues. Obviously it is a good thing for banks (and, equally, other financial businesses -- who will not figure in these recommendations) to strengthen their reserve position. Beating the drums on this point, though, avoids the harsh truth that the downfall of Lehman Bros, AIG, Merrill Lynch et al derived from their abusive trading and accounting practices -- not a weak reserve position. Lehman had more than double the level of reserves now being advocated. Enough said.

Run-away bonuses count because they encourage exaggerated risk taking. Linking them to long term performance rather than speculative gains is another good idea. But it will not work short of draconian controls that aren't in the cards. Getting a universal consensus on tough measures is an impossibility given American reluctance to start down that road. In the miraculous event that a meaningful accord could be reached, effective execution would depend on an even greater miracle. There are myriad ways for ingenious, money crazed financiers to circumvent any rules; this is the kind of invention at which they are superb.

Moreover, conscientious enforcement is unrealistic in the light of half-hearted, feeble regulation in Washington.

That leaves us with a thin menu of global reform -- a menu whose two main items seem better suited to promoting anorexia than robust performance. The prime elements are missing, inter alia strict controls on financial innovations such as Credit Default Swaps and Collateralized Debt Obligations, whose only value is generating rich profits for inside operators; uniform, tight regulations of all derivatives and of hedge funds who are the main players in that game; and steps to dismantle "too big to fail" banks who now hold governments hostage. As Simon Johnson of MIT, former Chief Economist at the IMF, has said, "There is nothing in the works to defang the financial system." This sad state of affairs is all the more shocking for indications as recently as this spring that there would be a serious push by Western European governments, led by Germany and France, for coordinated regulation of just that sort. There was even talk of an unprecedented Euro-American dust-up. The 'dog that didn't bark' will be one of the plot lines to untangle if this expectation proves to be correct.

The foremost imperative is an honest, believable statement in deed as well as word that governments, individually and together, have a crucial obligation to oversee markets in the interest of the commonweal rather than provide a protection service for a gambling enterprise to the benefit of its operators. That is the measure of progress that counts.

How did we wind up in this latest fix? First, the sense of mortal danger aroused by last year's near death experience has faded quickly. Unreasoning faith that 'happy days are here again' -- or around the corner -- has been actively fostered by Washington while other leaders find it tempting to set aside their doubts so as not to have to confront both the White House and a set of extremely onerous choices. In other words, classic avoidance behavior that is politically and intellectually convenient. Angela Merkel, for one, faces a General Election on Sunday wherein being seen at odds with Uncle Sam is a liability. So this epochal global summit originally intended to land the world financial system safely on a secure base looks more and more like 'a wing and a prayer' improvisation.

The lesson: no real reform will happen without the United States providing the impetus. That means clear, firm, unswerving leadership -- ready to take-on the heavy hitters of Wall Street -- from Mr. Obama in the White House. Good luck, all.

One favorable omen -- Pittsburgh's neo-Stalinist David L. Lawrence Convention Center, venue for the Summit, is on the sunny side of the street, Liberty Avenue.

 

 

Comments

[apduncan1]

Wall Street, the street of the con game.

[Leo Lovelace]

The Group of Twenty (G20) is an intermittent gathering of 19 regionally large national economies, plus the EU. It was established in 1999 by the Group of Seven (G7), allegedly the largest national economies, arranged to manage the international capitalist economy after the collapse of the dollar system.

It is questionable whether the G-20 has fostered "sustainable economic growth and development", as claimed by its London 2009 website. Beyond that, it faces several 'structural' problems. regarding its very status in world politics. First, it does not have global international legitimacy. Second, its decisions are not even remotely binding on the governments which sign them. Third, the world economy is operated by global transnational corporations which consider these inter-governmental activities as transaction costs.

The G20 meeting in Pittsburgh is bound to show an appearance of stronger global economic governance. It is doubtful however whether it'll make any real difference for managing the costliest transaction cost, the global capitalist system, under which the world economy is no longer capable of delivering a significant measure of true growth in a context of systemic sustainability and distributive challenges. A transformational way forward for the G20 would be to commit itself to enforce the principles of international economic and social cooperation provided in the U. N. Charter, to strengthen the Economic and Social Council, and the U. N. Conference on Trade and Development. But the G20 gathering lacks leadership, vision and courage to walk that path.

[baxterblack]

Protest this thing! That's the only way to get our leaders' attention.

[RogerHWerner]

I looked at the Greycourt White Paper and it's indeed worth a look since it brings to the fore a basic reason why University of Chicago free market ideology and the thinking of Milton Friedman were doomed from their inception. If economists spent even a small part of their research studying economic history rather spending all of their time with neat statistical models, Greycourt's White paper would be unnecessary. Graycourt suggests that in any economic system involving humans, humans will behave like humans; sometimes rationally but much of the time irrationally. It is possible to statistically predict rational behavior but human irrationality defies predictive modeling. While one can't predict the where, when, and extent of human greed, it is possibly to know that it will occur, which is the very justification for checks and balances and strict government controls over financial markets. The present system is designed and functions to make a few people rich at the expense of greater society. The fault for this lies with voters who authorized their leaders to ignore human irrationality and let the markets free. The sad part is the extent to which those with no power vote suffer as a consequence of what I can only view as voter stupidity.

[josephXY]

I'd like to add one factor that played a tremendous part and still does so: the media and their
influences, if not manipulation.
For instance the Peter Schiff video shows that unfortunately to often ignored aspect all too
clearly, in that the daily and overwhelming influence of the experts not so long ago.
Some faces of those who "experted" in the crisis - where a lot of irrationality came from:
http://www.youtube.com/watch?v=2I0QN-FYkpw

[Angie Cordeiro - Huffpost Blogger]

Chris Hedges' Columns
Globalization Goes Bankrupt

http://www.truthdig.com/report/item/20090921_globalization_goes_bankrupt/

[baxterblack]

Hedges is the man.

[freelyb]

Thanks for that. A real eye-opener.

[anticapitalist1983]

obama may say he is anti-protests publicly, but you can bet he'll be using the protests as a threat to get the banks to agree to reforms soon. he will say, "look, you deal with me, and agree to these reforms, or you deal with these angry mobs of people more and more in the future....­"

it's just like how MLK used to threat of more riots to get civil rights enacted.
or how ghandi used all the ter.r.oris­m going on in India as leverage to force the british to talk to him.

get on the streets. support the protesters:
http://www.resistg20.org

[baxterblack]

I hope he does, and I hope said reforms are better than what he has proposed so far. We need to reshape this economy and willingly downscale our standard of living to get through this thing. Said reforms can't be mere window dressing.

[anticapitalist1983]

i agree, and i'd add that the bigger, louder, and more often protests like this happen, the better the reforms will be. the more room progrssive dems will have to push on obama, and the more room he'll have to push on the banks.

protests are the tip you can see of an iceberg of change that they create.

[Froggie99]

Expecting certain leaders who are part of the corporate-elite culture club to voluntarily give up control over the levers of power which keep them rich and in control is as likely as expecting the return of the flower children of the 60s.
One has only to look back in history for the tremendous effort and iron will of the masses necessary when they "stormed the Bastille" to unseat Marie Antoinette and her ilk, or beheaded Tzar Nicholas and his entire family to understand what it takes to dismantle the elite power structure (nobility).
The way we are going about it now is going to take forever, and will not yield very good results. We are bringing down the likes of Conrad Black and Bernie Madoff and others with their ponzi schemes and embezzlers who sell dreams to the naive and build empires for themselves.
We have to clean up the mess at home FIRST, by overhauling Wall Street. Then other G20 countries will see that we are serious and will follow suit.

[HamletsMill]

Exactly. Will the U.S. lead? I am having a sinking feeling.

[josephXY]

Time to read something a bit longer (19 pages)?
Greycourt & Co., a Pittsburg investment adviser firm, some time ago published their
White Paper No. 44 (Nov. 08).
It is really surprising piece, for once getting to know the attitude of solid investment advisers
who mention - obviously out of their experience - how the "to hell with client" attitude developed
during the crisis, the more the banks were cheating, the more atogonism, contempt, they
had for their duped clients.
And certainly they leave no doubt about what they think about rewarding such behavious with
bonuses and whatever.
Interesting also the example of an Alcoa CEO who began to restore the ailing firm years ago
not by screwing it, but by caring for worker security (they had lots of serious accidents), and that's
been the road to success. To make this firm a high quality producer again.
http://www.greycourt.com/whitepapers/WhitePaper044-FinancialCrisis.pdf

[henegg]

a familiar writer had a column a while back.
(i believe it was ionic. ironic?)
one told the" parable of the cave". inside of
which men were chained, stored, since birth,
able to face only the wall, opposite the cave entrance.

all the men understood of reality was
shaped from the shadows corpus, cast
upon the wall before them, from the
light behind them.

welcome to the wal*

[ianrthorpe]

Astute observers have not seen any indication yet that the G20 leaders even understand the underlying problems of the global economy let alone have the slightest idea how to go about solving them.

http://www.greenteethmm.com/dailystirrer.shtml#g20_witch_hunt

[mcmchugh99]

They best thing they could do would be to reform the IMF and World Bank system, give the developing countries more control of these, and make them user-friendly to the poorer countries.

Because of the corruption of the US political system and the big corporate donations to both political parties, I never expect too much in the way of reform in the US. There is a huge disconnect between the voters out in TV Land and what's going on at the elite levels, but not in the way the Republicans think. It's the whole system that has most people alienated.