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Global Leaders Search for Financial Reforms at G-20 Summit

November 14, 2008 at 6:25 PM EST
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Hoping to rein in the global financial crisis, leaders are convening to hammer out plans to help their ailing markets and economies. Experts assess the challenges they will face in trying to reach meaningful agreements.
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JEFFREY BROWN: In addition to the ongoing housing crisis, every day brings new signs of a weakening U.S. economy, from dramatic new drops in retail sales to the daily volatility on the stock market, including today, to new announcements of layoffs in a range of industries, including the technology sector, with today’s word that Sun Microsystems will lay off up to 6,000 workers.

And the pain continues to spread around the globe. Just yesterday, Germany, Europe’s largest economy, announced its second straight drop in gross domestic product, signaling it had fallen into recession.

And China, long a red-hot economy, reported a dramatic decline in its industrial output in October.

To one degree or another, economic problems are being felt everywhere. And with that as a backdrop, leaders from the so-called G-20, representing most of the world’s economic output, are gathering in Washington this weekend for a meeting hosted by President Bush.

Some dramatic actions have already been announced. This week, China said it’s preparing a $586 billion stimulus package to keep the country’s economy moving ahead. China is expected to play a lead role this weekend.

QIN GANG, Chinese Foreign Ministry Spokesman (through translator): China believes this coming G-20 summit is a very important occasion for the international community to exchange views on the current financial situation and the future development of the world economy.

JEFFREY BROWN: Other struggling emerging nations, including three from Latin America — Mexico, Argentina and Brazil — will also take part in the meeting.

LUIZ INACIO LULA DA SILVA, President of Brazil (through translator): We have to inject liquidity into the financial system in order to generate jobs and increase purchasing and a healthy and productive economy.

JEFFREY BROWN: The gathering was originally proposed by French President Nicolas Sarkozy last month.

NICOLAS SARKOZY, President of France (through translator): This is a worldwide crisis, and therefore we must find a worldwide solution. But this answer will be overall more effective insofar that we find it together, we speak with one and the same voice, and rebuild together the capitalism of the future.

JEFFREY BROWN: The question now is, what kind of coordinated steps are available to the international community?

Yesterday in New York, President Bush warned against any framework that proposes too much new regulation.

GEORGE W. BUSH, President of the United States: We must recognize that government intervention is not a cure-all. For example, some blame the crisis on insufficient regulation of the American mortgage market. But many European countries had much more extensive regulations and still experienced problems almost identical to our own.

History has shown that the greater threat to economic prosperity is not too little government involvement in the market; it is too much government involvement in the market.

JEFFREY BROWN: Today, the Secret Service was closing off streets and preparing for the attendance of many foreign leaders at the National Building Museum in Washington, as the summit gets underway this evening.

Managing the ongoing crisis

Scheherazade Rehman
George Washington University
... we must remember that we are still in crisis management. And what this means is that we are trying to change the tires on a car while it's still rolling.

JEFFREY BROWN: And we look now at the problems that leaders are grappling with this weekend.

Scheherazade Rehman is director of the European Union Research Center and professor of international finance and international affairs at George Washington University.

Niall Ferguson is professor of history at Harvard University and author of the new book, "The Ascent of Money: A Financial History of the World."

And Moises Naim is editor-in-chief of Foreign Policy magazine and a former trade minister for Venezuela.

Well, Scheherazade Rehman, when you look at the range of problems out there, what most needs to be addressed in a meeting like this?

SCHEHERAZADE REHMAN, George Washington University: I think that we must remember that we are still in crisis management. And what this means is that we are trying to change the tires on a car while it's still rolling.

This started in the United States, rolled into Europe, Asia, Middle East, and now developing countries. So if you've seen what we've done so far, is we have tried to stabilize the markets with bailout plans to inject liquidity in banks and to guarantee loans to build confidence in the financial system.

In addition, central banks have coordinated to reduce interest rates so that we can offset some potential global slump which is inevitable.

So what's the next logical step? The next logical step are large, concentrated provisions for fiscal stimulus packages. We've seen China do it with $580 billion.

We should have done it, probably two months ago, but we didn't, and I think there is a real danger here. We are putting Americans back in their homes, but what's the point if they'll lose their jobs?

JEFFREY BROWN: All right, Niall Ferguson, what is your answer when you look out there? What needs to be addressed most?

NIALL FERGUSON, Harvard University: Well, one of the lessons of the Great Depression is that, if there isn't adequate international coordination, the crisis can very quickly spiral downwards.

What worries me is that the various stimulus packages and interest rate cuts haven't been terribly well coordinated. And unless they are, the global imbalances that are right at the heart of this crisis, the American current account deficit, the great Chinese trade surplus, will not be smoothly adjusted away but rather they will disappear as the result of enormous shocks.

So I hope that this weekend that the G-20 leaders will focus their minds on how best to resolve these imbalances gradually through growth rather than abruptly through a great contraction of the sort we saw in the 1930s.

JEFFREY BROWN: All right. We'll come back to some of those options, but let me ask Moises Naim. What options do you see on the table here?

MOISES NAIM, Foreign Policy Magazine: I agree that we need fiscal stimuluses around the world that are coordinated. We also need to restore trust. One of the things that we have witnessed is how, despite pumping a lot of money into the economies, it is very hard to get consumer confidence up and boost trust and unblock the credit system that is now clogged and is not working.

JEFFREY BROWN: What about the idea of some kind of international oversight board or regulatory system to monitor financial institutions? What would that mean? What are the pros and cons?

MOISES NAIM: One of the initiatives that is going to be debated this weekend is a regulatory authority that will concentrate on the 30 largest global banks. And there is no doubt that there will be some regulatory strengthening of the system.

What needs to be very carefully assessed is that, in the same way that we had an overshoot of too much reliance on the market, we can now move to an extreme in -- there is an overshooting of regulation.

JEFFREY BROWN: Which we heard President Bush worry about.

MOISES NAIM: And so the trick is never to have too much market or too much state. The trick is how you intertwine both and how you get smart regulations in place.

Coordinating world efforts

Niall Ferguson
Harvard University
... there's some really rich hypocrisy coming from the Europeans when they try to lecture the United States, because at the center of this crisis has been excessive leverage in the banking system.

JEFFREY BROWN: What do you think, Ms. Rehman?

SCHEHERAZADE REHMAN: I think Naim hit on something here. I think this summit, if anything, is going to expose the deep divide between the U.S. and the rest of the G-20 countries -- in fact, the rest of the world -- in terms of our view and philosophy of free, open, competitive economies.

JEFFREY BROWN: What do you mean?

SCHEHERAZADE REHMAN: Meaning that we believe that we would prefer competitive, open economies. The Europeans and the rest of the world function on a different basis.

The government is a party to the marketplace. It plays an active role. It's not an on-the-sidelines supervisor regulatory body as a referee.

And I think the Europeans, perhaps, are going to take this opportunity, as is the rest of the world, to perhaps lessen our agenda in terms of liberalizing and reshaping the economic model of the world in our own image.

JEFFREY BROWN: Well, Professor Ferguson, step in there. I mean, you're talking about a coordinated effort, but there are these different economic models at play that are all coming to the same table.

NIALL FERGUSON: Well, I think there's some really rich hypocrisy coming from the Europeans when they try to lecture the United States, because at the center of this crisis has been excessive leverage in the banking system. Banks have allowed their balance sheets to explode in relation to their capital base.

But guess which banks are the most leveraged? Not American banks, but, in fact, European banks. It's actually the German banks that come out on top when you look at measures of leverage, of bank indebtedness.

And I think the Europeans are rather complacent at this point. I think they underestimate the extent to which this financial crisis poses much bigger problems for Europe than to the United States.

So I would watch out, if I were a European leader. Coming here to lecture the United States about financial regulation might be rather an exercise in hubris to be followed swiftly by nemesis, when people realize just how serious the problems are in countries, including, I should say, my own country, Britain, which is on track to be Iceland mark two, when you look closely at the numbers.

JEFFREY BROWN: But, Moises Naim, doesn't that raise -- I mean, every country in a sense has its own problems and its own interests at heart. We heard Brazil's president in our set-up. Talk about a situation like that, when they come...

MOISES NAIM: This brings in what Professor Ferguson was saying. It also highlights that, yes, in this group of 20 countries, both highly industrialized, wealthy countries, and emerging markets that are going to meet, they are brought together by a sense of emergency, but they're also divided by their interests and their priorities.

Each one of these countries -- you know, this brings the old Tolstoy line about families. You know, all families suffer, but each one suffers in their own specific, particular way.

So each one of these countries attending this meeting is hurting by -- has been hit by the financial crisis in different ways. The way in which Saudi Arabia or Russia are hurting is different than China or Brazil or Mexico or the United States.

JEFFREY BROWN: Nobody is buying their oil in one case, and in another case they can't export...

MOISES NAIM: Exactly. And so what we're going to have is 20 countries that are together, in terms of their anxiety and the need to do something, but at the same time there are differences in models, there are differences in ideologies, there are differences in regulatory environments, and there are differences in their domestic politics.

Each of the leaders that is meeting today in Washington and tomorrow is facing a different political environment at home that is going to deny him or her certain options and pressuring for others. And making that -- creating a consensus in that context is not going to be easy.

Emerging markets play growing role

Scheherazade Rehman
George Washington University
The big emerging markets, like Brazil, India, China, South Korea, Russia, are huge economic pillars in the economic system, and they're now demanding a key role in the blueprint for a new financial order.

JEFFREY BROWN: To what degree does -- just the very fact that this is a G-20 -- you know, most of us are still used to the G-7 or the G-8, and it's grown and grown. To what degree does that reflect the new global economy, shifts in power within that economy?

SCHEHERAZADE REHMAN: Well, clearly, the new global economy has shifted. And we are not back in the 1940s or the 1970s, even.

The big emerging markets, like Brazil, India, China, South Korea, Russia, are huge economic pillars in the economic system, and they're now demanding a key role in the blueprint for a new financial order.

I think what's worrying many other economies that are not in the G-20 are the very developing economies. These have not been addressed. I mean, they have been left to the sidelines to some extent. They're going to be reliant on the IMF and World Bank funding, which is clearly not adequate in these cases.

The money is going to the richer countries, as it should, because without them the financial markets will crash again. But there is some concern about developing countries that are not specifically being addressed here.

JEFFREY BROWN: Niall Ferguson, I've been reading your very interesting book. When you get to a moment like Bretton Woods, for example, you had one major power, perhaps two after the war, U.S. and Britain. When you have 20 at the table, what's possible to do at a time like this?

NIALL FERGUSON: Well, I can't remember the last time I was present at a meeting where there were 20 people around the table and anything very constructive emerged, but that may just be academic life in action.

It's certainly true that when, in 1944, a new financial architecture was created for the post-war world, the Bretton Woods system, it was the G-2, Britain and the United States. And I must say, today I think we could do with another G-2 to look really hard at the fundamental underlying relationship of the global economy, and that is now the relationship between China and America.

In "The Ascent of Money," I talk about Chimerica, that one economy that's right at the heart of the system. It's the imbalance between China and the United States which is really the key to this crisis.

Let me put it this way. If China decides to switch its resources to a domestic stimulus program away from helping to finance the U.S. current account deficit, then we're in big trouble, because the U.S. is looking to borrow more than $1 trillion from the international capital market to finance its bailout.

I suspect that we need to look much more closely at the China-America relationship and not really worry about the other members of the G-18, who, frankly, could wait on the sidelines while the big questions are hammered out between the big two.

Debating power players' role

Moises Naim
Foreign Policy Magazine
Next year, 2009, ... all of the global growth is going to come from emerging markets. And so, indeed, some of these emerging markets are in a slowdown, in a meltdown for reasons that are -- you know, they have done things by the book.

JEFFREY BROWN: But so staying with you, I mean, the U.S. is the host of this meeting, after all. So what role does it have coming into the meeting?

NIALL FERGUSON: The problem is that the host is President Lame W. Duck, and that really puts the mockers on the likelihood of this meeting delivering any very positive result, especially after President Bush's I thought rather inflammatory speech yesterday.

I must say, when I hear President Bush defend anything, I have to question it. And when I hear him defend the free market, then even I, as a staunch free-marketeer, become a little bit nervous.

This doesn't set things up well. We've got the Spanish representatives talking about coming to attack economic neoliberalism. I mean, this has the makings of a really pointless slanging match at this point.

And as I've said, I think it would be much better if the United States were to talk directly to one of its biggest creditors, if not its biggest creditor, China, and try to ask the question, how can we coordinate our stimulus packages? How can we coordinate our monetary policies so that our relationship doesn't break down?

Because I think if that China-America relationship goes wrong in the year ahead, then the world comes significantly closer to a Great Depression rather than just the big recession that we currently face.

JEFFREY BROWN: What do you make of this, Moises?

MOISES NAIM: Yes, I want to slightly disagree with Niall. Yes, the Chinese-American relationship is very important and needs to get right, but not at the expense of ignoring other countries.

Next year, 2009, most of the global growth -- all of the global growth is going to come from emerging markets. And so, indeed, some of these emerging markets are in a slowdown, in a meltdown for reasons that are -- you know, they have done things by the book. They have been well-behaved.

Brazil is an example. They have been doing everything right, and now they are being hit by the crisis.

JEFFREY BROWN: But, Moises, you're saying not of their making?

MOISES NAIM: Not of their making. So it's very -- and other countries, you know, the Indonesias of the world and the Indias, it's very important that those countries are somehow protected or boosted and not let down because the growth that we're going to have in the world is going to come from emerging markets in 2009.

JEFFREY BROWN: And so you're saying they need to be at the table?

MOISES NAIM: Yes.

JEFFREY BROWN: And what do you say?

SCHEHERAZADE REHMAN: Well, I think the truth is somewhere in the middle. I think Professor Ferguson is right, you know, that there are few large players in the world. And, clearly, the large global financial markets is in New York and in London.

And they have to be at the table. And they will be the key designers to some extent. But that does not preclude these other major emerging market economic powers that have come to light over the last 20 years. So I think it has to be a little bit of a combination of both.

I'll add one more thing here. I think it's not just the lame-duck U.S. presidency which will yield us, yes, less results, but I think that the U.S. is coming into a very serious meeting without having a very serious -- without having a very specific agenda. And that does not help.

The agenda is quite loose. We want to head off any threats for protracted slowdown in the world economy, and we want to forge a new global economic order and financial order. That's a tall order.

So I think that, without a specific agenda and the fact that we are facing some accusations from the world that, while we were pushing for supervisory and regulatory bodies across the world, we neglected our own domestic market. We should have had better surveillance, perhaps.

And I will add one more thing. The French and the British coming into this meeting, perhaps using it as some political leverage for their own domestic politics, does not help this situation much.

JEFFREY BROWN: All right. We'll have to leave it there. Niall Ferguson in New York, Scheherazade Rehman, and Moises Naim here, thank you all very much.

SCHEHERAZADE REHMAN: Thank you.

MOISES NAIM: Thank you.

NIALL FERGUSON: Thank you.