The G-20 “crisis summit” looks like it will turn into a crisis all its own. For the weeks leading up to the meeting there has been hope that the nations who will attend would be able to create a united approach to pull the world out of a recession that, by some estimates, could cost 50 million jobs across the globe. But, there will be no unity of programs and each country coming to the gathering may well end up taking a different approach to making their own economies, and by extension, a part of the world economy, much better.
If Obama’s goal is the have a unified position from the G-20, a position which he can take back to the business and financial communities and Congress, he has lost that battle before it began. He is, essentially out of luck before he boards Air Force One.
According to Reuters, Continental Europeans have summarily rejected UK Prime Minister Brown’s and President Barack Obama’s call for governments to spend more. From the perspective of nations that probably have little access to capital, their objections to the stimulus plans of the UK and US is understandable.
But, the objection may not be entirely self-serving. The European reservations mirror those of many members of Congress and a number of economists. Although the same analysis will be rehashed in London, the question is whether the financial world has changed enough during the two months since the G-20 gathering was planned for the major premises of the either side of the debate to have been altered.
The original concern of the leaders who will come to the summit is that a lack of regulation was the root cause of the financial and credit catastrophe that ruined the international banking system. Leaving aside whether regulation can, in and of itself, make the financial markets less risky, increasing the power of regulatory bodies costs almost nothing in terms of creating new laws and staffing oversight agencies. There should be very little argument on that point. Every nation coming to the G-20 summit can afford to further regulate its banks and financial markets. However, there has been little time allocated for discussion of the costs of financial regulation.
So, the issue of the expense of regulation is no issue at all. The real problems are much different. Does regulating an international bank make it more or less likely for the institution to lend to the people and industries that a government believes should have access to more capital? Since major financial firms operate in dozens of countries, there is no uniform set of answers to that question. The same holds true for leverage. Does a hedge fund create jobs and financial credit opportunities by helping to improve market liquidity though investments with complex insurance instruments like credit default swaps, or are these derivatives too risky to be allowed to trade freely? Since there is no way to come to an irrefutable conclusion about credit and leverage, any decision to regulate or not regulate is based on educated guesses.
So, regulation ends up being a two-sided coin. One wears the face of the process of regulation, which has the attraction of costing almost nothing. The other represents the risk that the fruits of regulation could constrict financial market activity so significantly that it undermines the chances for ending the recession.
The other argument that the US will not win at the meeting is its position that the medicine of spending tens of billions of dollars to create jobs, cut taxes, and bailout banks is better than the side-effects of having a staggering national debt, a debt which revenue collected by the IRS may not decrease at the rate that the Administration claims that it will. For France, the matter is academic. It does not have the ability to borrow hundreds of billions of dollars though the world’s credit markets. Even if it is philosophically opposed to a large deficit, it is poorly equipped to create one through borrowing.
Obama and his aides will say in London what they say every minute of every day to anyone who will listen. If the American government does not allows its deficit to rise into the trillions of dollars, the consequences will be a depression which will last for several years and put more millions of Americans out of jobs. The US tax base will be ruined, which will cause huge deficits because of rapidly falling IRS collections as corporations and individuals lose their ability to create income. Even if government keeps expenses as they were last year, the budget deficit will balloon and the Treasury will have to issue more debt to cover the difference.
It is a hell of a world when the best defense for spending a trillion dollars and adding to the national debt is that it needs to be done to preserve a trillion dollars in revenue to the Treasury from individuals and companies which would otherwise be to0 crippled by the economy to pay taxes
Douglas A. McIntyre
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