And now the real G-20 Communiqué

Give me credit for getting exactly right the first eight words of the G-20 statement issued today, but otherwise there is a fair bit of daylight between my version and the official one.

I was not expecting any substantial agreement on international regulatory coordination or any semblance of a new Bretton Woods, so I am not disappointed on that score.  What I was looking for were three things: (i) coordination on fiscal stimulus; (ii) a commitment to provide more liquidity support, as needed, to prevent a further spread of the crisis to emerging nations; and (iii) a clear commitment not to engage in trade protection, with a monitoring mechanism to ensure the pledge is being observed.

How does the statement do in these regards?  So-so.  There is no coordination in the fiscal arena, the promises made to emerging markets are vague, and even though there is a clear statement on protection and export subsidization, there is no monitoring or enforcement mechanism.

What about the longer-term issues? The fundamental dilemma of financial globalization is that regulation and supervision remains national while financial markets are international.  The statement recognizes this dilemma:

Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace.

The "action agenda" outlines several areas of international cooperation and coordination in the months to come.  Finance ministers and national regulators are tasked with the responsibility of bringing these recommendations to life.  As I said in my own version of the statement, "a key challenge will be ... to strike an appropriate balance between common international regulations, on the one hand, and space for domestic approaches that may diverge from harmonized regulations, on the other."

Comments

[Don the libertarian Democrat]

I just read through it, and it seemed to be simply a statement of the kind of world we'd like to live in. There didn't seem to be anything to argue with, because there weren't any specifics. What was the point? Why not just say we'll try and do things better in the future?

[Per Kurowski]

Let me share with you from my Voice and Noise my personal experience as an Executive Director of the World Bank 2002-2004 with these “Statements” or “Communiqués” as they are more elegantly called

“The Annual Meetings Development Committee Communiqué

I must confess that I do not really understand how it gets produced. We sort of start out by pitching out a lot of issues to ourselves and then we go over to the other side and bat the balls back for about eleven continuous hours just so that we can later have a chance of fielding them again in our Board meetings six months later. It is hard to tell whether we are in a virtuous or a vicious circle or, if at the end of the day when we get some issues out of the loop, it is because we have adequately exhausted these issues or because they have just exhausted us.

Nonetheless in this unpleasantly volatile world we might find comfort in the thought that our communiqués provide an inspiring source of stability—as they always read the same.

Any readers who do not understand what I am talking about should not worry. The preparation of communiqués is like one of those strange initiation rites impossible to describe to anyone not part of them … and to most who are part of it.”

Cheers

[Per Kurowski]

But on a more serious note let me question it when they say:

“Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage…”

What more discipline could they want than having imposed on the markets as a Governess Fraulein Credit Rating Agencies and that later turned out to be so crazy as to guide them to the subprime swamplands? Do they really believe that finding a better qualified Mary Poppins, or a Maria will do it? Scary! Why don’t they leave the banks alone so that they learn to depend on themselves instead of following as a herd any agency that no matter how good it gets, is bound to take them, and us, sooner or later, over a cliff?

“Adverse impacts on other countries”? Like when the supposed global good of a credit rating agency turned into a global bad and caused a German bank that had never awarded a mortgage in Germany to be the first casualty of this subprime mortgage having followed the AAA signs looking for high risk-weighted returns in California?

“including regulatory arbitrage? Are we now finally to get rid of the current “minimum capital requirements for banks” that has created such a damaging and useless regulatory arbitrage on risk…whatever that now is?

[Barkley Rosser]

The statment does call for the development of "colleges of supervisors" (that is, of regulators). In the near term this may be the most realistic approach to moving towards international coordination of regulation, and had begun more informally already. This involves how a specific multinational enterprise, particularly a financial one, is regulated, with the regulators from the main nations the enterprise operates in meeting together to coordinate their regulation of that specific enterprise. To the extent this can be done, this is a good thing.

The main problem with this will be to coordinate to shut down the loophole escape hatch sorts of places such as the Cayman Islands. This will involve the G-20+ countries forbidding their own financial institutions from dealing with any entity operating in environments that do not enforce internationally accepted financial standards.

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