Monday, April 6, 2009

G20 - Mark II

In my previous post, I managed to get hold of the 2008 G20 communique, and therefore spent considerable effort analysing an out of date document. Following on from this credibility sapping disaster of analysing the 2008 G20 rather than the current one, I shall try again. This time the full text can be found here.

Having analysed the details of the last communique, the most striking thing about the latest one is how little has changed. One year on, and the main difference is that there is a sense of greater panic in the new version, but the solutions remain the same. Furthermore, there is no indication that any of the points in the last communique have made any difference whatsoever to the direction of the world economy.

Having erroneously analysed the last communique instead of the recent one, I find myself at a loss to actually analyse this communique. I suggest a reading of my first erroneous post, as many of the points remain the same. The actual substantive differences are largely elusive. There is an element of crowd pleasing measures, such as the crackdown on tax havens, and some witless discussion of a 'green' recovery with no substantive backing behind them, and chatter about millennium development goals. None of this is of any significance to the world economic crisis.

There are the same calls for a more global regulatory system, with the same problem of mixed messages on international cooperation and national systems, and many discussion of many actions that are already in process. There are the same calls for stabilising the financial system - which simply serve as a reminder of how much money and for how long the money has been poured into the financial system, only to still see it remain in a state of dysfunction.

This is not to say that there is nothing new, but rather it is largely reactive to measures that are already in place. Many of the proposed actions are actually a recording of what some of the governments have already done, rather than commitments to new action. Furthermore, I have recently seen elsewhere that many of the figures for various stimuli are simply double counting....

Perhaps the first difference that first struck me was the language of Gordon Brown seeping through the text. A typical example is as follows:
...that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families.
There is much more similar fluff, to which I will devote no further attention. However, the level of fluff appears to have increased, and this is perhaps a signifier of how little change there really is. Returning to the meat of the communique, there is a difference in tone, but no substantive difference in the broad intent in the proposed solution/s. There is a stronger emphasis on a 'global solution' but this was the underlying intent of the last communique. The way that this 'global solution' takes shape can be found in the following key points (quotation):
  • 'restore confidence, growth, and jobs;
  • repair the financial system to restore lending;
  • strengthen financial regulation to rebuild trust;
  • fund and reform our international financial institutions to overcome this crisis and prevent future ones;
  • promote global trade and investment and reject protectionism, to underpin prosperity; and
  • build an inclusive, green, and sustainable recovery.'
Much of the text puts flesh on these bones, but much of the flesh is already in place in various countries, and nothing much appears to have changed in the objectives since the last communique.

However, there are a few points worth in the detail worth highlighting. The first of these is one of the most important, and that is that there is a commitment to not use devaluation of currency as a way out of trouble. However, the ongoing expansion of the money supply in countries in the US and UK might reasonably be seen as just one kind of such devaluation. The Chinese government have stressed their ongoing concerns at the risk to the $US of lax fiscal and monetary policy, and they might be seen as potential 'devaluers' themselves as their export machine comes to a halt.

The policies of printing money do get some attention in the following passage.
We are resolved to ensure long-term fiscal sustainability and price stability and will put in place credible exit strategies from the measures that need to be taken now to support the financial sector and restore global demand
This is a coded way of suggesting that the means of pulling the money supply back from the binge of money printing is vital, and is clearly aimed at those who have already turned on the printing press. However, once again, there is no substantive measures, just vague suggestions.

Overall, whilst highly embarrassed at analysing the old text, I am actually quite relieved that I did so. It has allowed me to see two key points in the latest communique. Firstly it is really, with a few exceptions and difference in detail and some additional fluff, a policy of 'more of the same'. The second point is that the first dose of the same medicine has done nothing to reverse the ongoing decline. Where there are any shifts in the underlying substance, such as the policy of recovery from money printing, there is absolutely no way to account for whether an individual government might be acting within the intent of the communique.

Overall, this appears to be a communique aimed at crowd pleasing, rather than offering anything which will significantly alter the current state of the world economy. As in the 2008 communique, it is possible to see a disregard of the underlying causes of the crisis, though this time there is even less discussion of the imbalances in the world economy, perhaps reflecting the increasing influence of China.

In short, it really is more of the same. The 2008 communique offered much the same message, but it is difficult to see that the previous G20 meeting led to anything that helped resolve the crisis, and little reason to believe that this current agreement will lead to anything that will make any new impact. Most of it is simply codifying what has already been agreed/taken place.

It is, quite simply, a piece of theatre.

Note 1: Once again I would like to restate my apology for the fundamental error in my last post. I have taken considerable care in this blog to try to use sound references and information. In this case I failed to do so for a simple error of not checking the date on the article. On the upside, it is a lesson I doubt that I will need to re-learn. Another upside is that I have some of the best editors that can be found - you the readers. The only trouble is that this is retrospective. Once again, thanks Tiberius for (so politely) pointing out my error.


  1. Dear Mark, the "mistake" is no problem at all, I still read it with great interest. Thanks for another master piece of writing.

  2. I just found this article which suggests that I am not alone in thinking the RMB might be the new reserve currency:,0,865582.story

    ...almost exactly what I recently posted...

  3. Cynicus,

    It's a mistake I'm glad you made as I don't think the latest G20 offering would have made much sense if not put in context of the previous.

    Kudos on two excellent analyses!

  4. What a great mistake to make, though! I've done something similar myself once and was equally embarrassed. No need to be. Things happen. It doesn't devalue your commentary at all.

    It's not as if you're being paid to do the job, so who has the right to take you to task for making a rare mistake on your research? Nobody.

    Nice article. Interesting, though nothing new. Most of your cricisisms match those made by other commentators. Which in itself is notable. Does this mean that people are finally catching up with your scepticism? That's probably good news. The last bubble to burst was always going to be the information bubble.

  5. George Soros is much more positive about the outcome of G20.

  6. On Financial Regulation as a Solution to the Current Crisis

    There is no doubt that the massive trade imbalances between East Asia and the US need to be addressed, as does the rebuilding of productive industries in Western countries.

    But in any effective solution of the current crisis, financial regulation will be fundamentally important.

    The period between about 1980 and the early 2000s was characterized by extreme financial liberalization in comparison with the 1945-1980 period of tight and effective financial regulation.

    The light regulatory framework that replaced it (including Basel I and II) was certainly flawed and contributed to the current crisis, but it was the absence of serious regulation that allowed the problems to become so extreme.

    Hence deregulation is the fundamental problem, not regulation itself.

    One cannot deny that in comparison with the 1945-1980 period, the last 20 years have characterized by a major trend towards deregulation.

    For instance, from about the 1930s to the 1980s, many countries had policies of financial regulation that included many of the following:

    1. Interest rate ceilings
    2. Liquidity ratio requirements
    3. Higher bank reserve requirements
    4. Capital Controls (that is, restrictions on capital account transactions)
    5. Restrictions on market entry into the financial sector
    6. Credit ceilings or restrictions on the directions of credit allocation
    7. Separation of commercial from investment (“speculative”) banks
    8. Government ownership or domination of the banks

    Ito, H. 2009. “Financial Repression,” in K. A. Reinert, R. S. Rajan et al. (eds), Princeton Encyclopedia of the World Economy, Princeton University Press, Oxford and Princeton, N.J. pp. 431–433.

    These were abolished as financial liberalization and capital account liberalization became widely adopted in the 1980s and 1990s.

    To take one example: if serious capital controls were still in place, then the toxic asset-backed securities could never have been bought by European and overseas banks outside the US.

    Some specific comments:

    A belief that the same regulators who set up the current system, with terrible results, will be able to regulate against another crisis

    A good point. The solution is that any serious regulatory legislation would stop the revolving door between commercial and investments banks and government or quasi-government bodies like central banks and regulatory agencies.

    A belief that risk can be seen in advance, even though history shows us that it can not be foreseen

    The issue is the minimization of risk, not its complete abolition or a completely accurate prediction of future risks.

    A belief that a more unified regulatory system will stop crises, when the previous attempt to do so helped create the systemic nature of the current crisis

    Basel I and II were watered down and pale reflections of the robust financial regulatory systems that existed before the 1980s.

    Was there ever a financial crisis like this one in the 1940s, 50s, 60s or 70s?

  7. Why were no Bank Bailouts Necessary in Canada?: The Reason is Effective Financial Regulation

    In 2008, the World Economic Forum ranked Canada's banking system as the soundest in the world. The U.S. system was ranked at number 40, and Germany and Britain ranked 39 and 44.

    Canada’s banks have required no bailouts or government intervention to save financial institutions.

    If Basel I and II led inevitably to asset bubbles and financial collapse, then why has this not occurred in Canada?

    The answer is fairly simple: Canada, unlike many other Western countries, still has tight and effective banking regulation.
    That the role of Basel I and II in the present crisis is exaggerated is suggested by the fact that “Canadian banks were the first in the world to adopt risk-
    management approaches under the new international Basel II capital framework, which sets out rigorous requirements to ensure a bank holds adequate capital reserves appropriate to the risk it is exposed to through its lending and investment practices.

    Canada's banks offer haven in turbulent sea
    Vancouver Sun, Saturday, September 27, 2008

    Harper credits regulations for preventing bank bailouts

  8. Cynicus,

    There is no way that the RMB will become the reserve currency. Becoming so would utterly destroy the Chinese state (socially and politically). It would be utter suicide.

    There is another opinion in the tubes you should think about: the IMF may well be in the process of introducing SDRs as a replacement for the USD as the reserve currency. Of course, the owners and agents of the FRBNY would have a major role in the control of this new basket of currency.

    The long term goal would be for currencies of other nations to be pegged to this SDR basket allowing central control of those currencies.

  9. A switch will also majorly depend on the commodity exporting nations and which currency they prefer. Any comparion of GDP figures for the US and China has to take into account that the US figure is artificially inflated, whilst the Chinese figure should be higher when accounted for the real value of the RMB. Overall living standards in China are fine in big cities with most work to be done in terms of housing, don't be fooled by the hundreds of millions of people that live on the countryside who drive GDP/head numbers down to think that China is a poor country.

  10. As usual a very interesting post. I have been reading regularly. However, you certainly are cynical, but at least you don't hide this fact!!

    I just wanted to add that I am extremely optimistic that the current recession will end within the next 12 months, mainly because of G20 and the stead-fast and resolute determination of governments do take whatever step is necessary to avoid the collapse of banks.

    It is sometimes obvious to think that the current problems should have catastrophic consequences to the western economies. However, entrepreneurs and highly intelligent business leaders will always be one step ahead. As long as the government can stop a collapse, it will not be long before our entrepreneurs begin to create growth again.

    A cynical approach is business or economics is always the wrong approach because of this. All cynics eventually realise that their predictions of doom and gloom never happen, and eventually they fall silent to be replaced by new cynics.

    I am not being critical or your analysis, but you will begin to notice your predictions always being pushed further into the future. (i.e. dollar/sterling collapse)

    Otherwise, excellent posts.

  11. This is an interesting link too

  12. Thought this many interest some:

    Swiss to lend IMF up to $10BN for crisis

  13. Another link - not sure who this orgnisation is but it's interesting stuff

  14. Mark, please don't worry about having analysed the 2008 communique. As you say, it was a useful exercise to review both of them, anyway, and to notice that there is even less acknowledgement of the real reasons behind the crisis than a year ago.

    Any views on this organisation?

    Two points they discuss:
    (a) The threat to the euro zone of the implosion of East European economies has been exaggerated deliberately to weaken the euro's claim to reserve currency status.
    (b) The world economy may grind to a halt in a similar fashion to the fall of the Roman empire in 476 AD due to debasement of the currency.

  15. And one for all you New World Order buffs:

    Sleepwalking our way towards a world currency

  16. Sweden’s Bank Bailout versus Japan’s

    A far better type of solution to the present US and UK crisis is the policy employed by the Swedish government for its financial crisis in 1992.
    Financial deregulation in the 1980s caused a flurry of real estate lending by Swedish banks, and when the bubble finally popped in 1991 and 1992 there was a major economic contraction. Bank failures and a financial crisis occurred. The solution?
    Here it is as described in the New York Times:

    “Sweden told its banks to write down their losses promptly before coming to the state for recapitalization. Facing its own problem later in the decade, Japan made the mistake of dragging this process out, delaying a solution for years ….
    By the end of the crisis, the Swedish government had seized a vast portion of the banking sector, and the agency had mostly fulfilled its hard-nosed mandate to drain share capital before injecting cash. When markets stabilized, the Swedish state then reaped the benefits by taking the banks public again …. Soon after the plan was announced, the Swedish government found that international confidence returned more quickly than expected, easing pressure on its currency and bringing money back into the country.”

    Carter Dougherty, “Stopping a Financial Crisis, the Swedish Way,” New York Times, September 22, 2008

    Sweden also solved the problem of zombie banks:

    If Obama wants to have a successful Presidency and prevent the present recession from turning into a 1930s style depression, he would be better served to stop taking advice from long-time Wall Street servants like Geithner and Summers and start studying the contrasting approaches to Japan and Sweden to their respective financial crises in the '90s. Japan acted slowly, followed an approach much like Paulson's and Geithner's, and experienced what has been termed a "lost decade" of economic stagnation. Sweden acted quickly to take over its Zombie Banks and returned to financial health relatively quickly, while returning a significant portion of the government's investment to the taxpayers.

    Help Wanted: Swedish Model to Kill Off Zombie Banks


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