Tuesday, April 7, 2009

The London G20: A New Start or Business as Usual?

Touted as the most important economic summit since World War II, but does the proposed reforms of the London G20 really save our ailing global economy?

By: Ringo Bones

Even though US President Barack Obama is probably the most influential policymaker of the London G20 economic summit because the US together with the UK and Japan managed to put forth their proposals of spending more money in order to save our ailing global economy. Never mind President Obama’s powers of “Diplomatic Persuasion” during the London G20 summit. Although France and Germany’s call for tighter regulation of the global economy was eventually approved, it seems like every sensible proposal – make that “conventional proposals” - to save our current global economic crisis was eventually embraced by everyone. The question now is will all these measures that we’ve taken really save our ailing global economy?

Throwing money at the problem was readily approved, given that it had saved Japan’s economy during her “Lost Decade” even though the policymakers haven’t dealt with the bad banks / zombie banks fast enough. Thus the plan to spend 1 trillion dollars to rehabilitate the global economy was given the green light. 750 billion dollars of which will serve as an extra resource for the IMF to help countries on the verge of financial collapse, most of which are Eastern European states. While 250 billion is promised as trade credit overdraft for cash strapped countries, in other words, a kind of export insurance for the global trade to make protectionism less profitable.

The call for tighter regulations on financial institutions was also given a green light. Especially those pertaining to key players like hedge funds, credit derivatives, and credit rating agencies. Plus stricter compliance of capital requirements; especially when it comes to capital risk requirements; like Basel Accord / Basel II implementation compliance; a crackdown on tax havens and a call to end arcane bank secrecy laws as an institution. And finally the creation of an early warning system to prevent the repeat of the July 2007 subprime mortgage crisis from spreading out of control. Even though every key players of the London G20 eventually reached a somewhat concise consensus, but does all of these proposals really work in practice?

Brazil’s president Luis InĂ cio “Lula” da Silva said that the financial sector should be congruent with the production sector in order to avoid a repeat of our current economic crisis, or to avoid our current one from becoming worse. Has he got it all figured out? Given that investment banking had been making money out of thin air in an unsustainable manner, Brazil’s president could be on to something. Though his suggestion will never ever be taken seriously or do most of the ones proposed during the London G20.

For the very reason that the global capital markets had already grown into a powerful economic entity since Ronald Reagan ruled the free world and it is very unlikely to be influenced by the various heads of state’s consensus made during the London G20. This is where the “business as usual” part of the global economy trumps the altruism of the London G20 consensus. It looks like “leave it alone” capitalism is a dead end because it tends to go into excesses. In short, it can’t reform itself.

But there are very good reasons for everyone to be optimistic of the consensus reached during the London G20 summit. The proposals put forth by the various NGO’s to aid the world’s poor during times of crisis were eventually given the green light. Even the rock star and anti-poverty activist Bob Geldof was very optimistic about the consensus reached during London G20 summit. The London G20 could be capitalism’s make-or-break moment to reform itself.

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