Good for pollies, if no-one else

Monday, 6 April 2009 

Chris Uhlmann must have clearly enjoyed London because even his anti-government cynicism was swept away by what came out of the G20. It is hard to see why. It gave us the re-packaged, the token and the useless.

First the re-packaged. The extra monies allocated to the IMF amounted to little more than that already promised six months before, so unless the major countries reaffirming that they weren’t lying about their previous commitments amounts to an achievement, it isn’t.

Then the token, the cap on executive pay effectively re-states guidelines that already exist here, but it nevertheless keeps up the pretence that the Global Financial Crisis started in Wall Street last October rather on Main Street the year before. Presumably this is because it is more comforting to think of the crisis starting with the risk-taking of over-paid financiers than giving mortgages to the lowly paid.

The myth that this is all about excessive risk has led to the summit’s third non-achievement, a new framework for global financial regulation. Or at least the vague promise of one, which is all it is ever likely to be as the US will never allow a foreign body to regulate its financial system. Even if it is true that the real problem is excessive risk-taking and credit in the financial market, wouldn’t it have been better to do something about it when it was actually happening rather than after it has all collapsed?

This is not even a case of shutting the door after the horse has bolted but closing it when it wants to come back in. The irony is that while governments attack the evil of risk-taking in the financial system, at the same time they are having to encourage the banks to do the opposite right now. The number one problem identified by the governments at the moment is the banks’ refusal to lend. But this is a normal response at this stage of the cycle when banks are keener to rebuild their balance sheets than lend to businesses heading into a downturn. By pushing the banks to lend at a time when the economy is in free fall, governments are in effect asking the banks to take on more risks than they normally would.

Which is fine, but what should have happened as even a starting point is for the banks to be re-capitalised so that lending can start. Yet after having identified this problem since the sub-prime crisis broke a year and a half ago, little progress has still been made on this core problem and certainly none was at the G20 Summit. The only move was the US’s unilateral decision (so much for a globally co-ordinated regulatory framework) to allow US banks not to have to report their assets at market value, a paper move, but enough to send the markets up when it was announced.

If the market’s response was understandable, the media’s was less so. They duly reported the rift between Europe and the US that was behind the lack of real outcome from the Summit. However, none of the political leaders are strong enough to turn that into a full scale walk-out, even the histrionic Sarkozy, especially if, for these uncool politicians, it meant not being able to be photographed with the currently über cool US President. So all the politicians had a self-interest in making non-action look like a result and here at least, they got away with it.

What this means for Rudd is that he has avoided the immediate political fall-out that would have come from an openly failed conference and indeed has won an international endorsement of what he has done so far. But he still doesn’t come back with anything tangible that will help him deal with the next stage of the downturn. Maybe that’s why the media were so willing to suspend disbelief. Loving a narrative as they do, perhaps they don’t want to think about the obvious question, now what?

Posted by The Piping Shrike on Monday, 6 April 2009.

Filed under International relations

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6 responses to “Good for pollies, if no-one else”

  1. Larry Buttrose on 6th April 2009 1:19 pm

    Sorry, I didn’t see the media response you mention, Shrike. The only media I saw appeared to be reporting a politician being rude to a flight attendant over a meal order. There was some passing mention of a meeting of big-wigs in London, but who cares about that compared to pique on a plane?

  2. Graeme on 6th April 2009 3:25 pm

    Shrike, love your work. But an economist you aren’t.

    You imply the crisis was not one of financial risk, but of inappropriate mortgage lending. That’s the sound of Dr Albrechtsen clutching at straws.

    How on earth would a portion of US housing loans (if they ALL went bad, under $1tn) have caused a multi-multi-trillion dollar financial crisis, if it weren’t for whacky and whacked practices in international ‘banks’?

  3. charles on 6th April 2009 6:07 pm

    Arrr come on be positive. It’s over if we all agree it’s over. This is man made.

  4. The Piping Shrike on 6th April 2009 7:14 pm

    How on earth would a portion of US housing loans (if they ALL went bad, under $1tn) have caused a multi-multi-trillion dollar financial crisis.

    Because ultimately this is an economic crisis, not a financial one. The reason why the collapse of the CDOs etc was so devastating (and they were so profitable) was because there was so much reliance on them (not just by other banks, governments too). The massive expansion in credit was made necessary by economies that were basically unproductive and hiding behind credit to carry on. Now that its gone, the state of the ‘real’ economy in the US and Europe is revealed and it isn’t pretty, especially compared to more productive ones like China (now that is something I think you won’t read in Albrechtsen).

    What everyone has done is focus on the last stage (or the right on the penultimate stage) of the problem rather than the ultimate driver of it, presumably because the real problem is less susceptible to government regulation.

    Maybe on the media I was too struck by the suspension of Uhlmann’s normal anti-government cynicism. But I haven’t read too much saying it was the flop it was.

  5. Cavitation on 7th April 2009 9:24 am

    The importance of the G20 meeting in London is that it took place at all; and that the outcome was benign. There is now an organisation made up of 20 of the most significant and economically important countries, all cooperating in dealing with our economic problems. The third world is now sitting at the world’s board table. This is an immense achievement, and some credit seems to be due to our own grumpy PM.

    The results were ok. In fact, there is not a lot that the G20 countries can do. Continental Europe was never going to be keen on the conference, since their influence is now lessened by the extra seats around the conference table. The current brightest idea for dealing with the crisis, expansionary government spending, is not popular with the Europeans, considering what happened when they tried the same thing after the great depression – the rise of nationalism, and fascist/communist governments due to the inflation that resulted. These are valid fears, and they may be right, to just let things run their course.

    But some useful things were done at the G20 meeting, and all the G20 countries now have motivation to take ownership of their actions. It’s early days yet, but the amount of carping from the sidelines from non-Anglo-Saxon countries seems to have lessened.

    Sometimes just doing no harm is the best among the actions available.

  6. Macondo on 12th April 2009 3:07 pm

    I agree with your positing of this ‘crisis’ as an economic one. The Anglophone economies in particular, and slightly less so the imitative Euro economies, have come to depend largely on debt as the ceator of economic growth or at least the appearance of it; a consumption-dependent economy like Australia’s is by its very nature a bubble, especially when the nation produces less and less ‘stuff’. ‘Finance’ is virtually Britain’s only world-class ‘industry’ these days, or at least WAS. Economies built on housing and the finance sector can’t be very robust.

    But Albrechtsen et al’s hysterical blaming of the do-good left for causing the massive mortgage borrowing by the unable-to-pay-back, fails to acknowledge that there must have been in-waiting an enormous and eager desire to lend (and therefore to create more financial ‘products’ to meet the demand), with the vast pool of money in this world constantly looking for things to ‘invest’ (read speculate) in. I would be careful about whom to blame for the mortgage defaults of the poorly paid.

    Yes, it’s one thing for banks to be ready, willing and able to lend again, another for householders and businesses to be ready to borrow, as they ‘deleverage’. This has been pointed out by people such as Krugman and Galbraith. It would be ironic if banks, in order to start lending again, became more risky in their practices in order to secure borrowers. So you are right, I think, in implying that economic fundamentals have to be addressed before banks are pushed into lending again. Economies inflated by debt need to shrink, but at the same time get back to producing things and employing people so that real investment in enterprises may take place rather than mere speculation on intangibles.

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