G-20 Statement & My Interpretation - Part 1

The following is the text of the Statement from the Group of 20 summit.  I will translate and interpret it point by point.

1. We, the Leaders of the Group of Twenty, met in London on 2 April 2009.

2. We face the greatest challenge to the world economy in modern times; a crisis which has deepened since we last met, which affects the lives of women, men, and children in every country, and which all countries must join together to resolve. A global crisis requires a global solution.

Things stink all over due to this mess, and it has gotten worse lately.

3. We start from the belief that prosperity is indivisible; 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, not just in developed countries but in emerging markets and the poorest countries of the world too; and must reflect the interests, not just of today’s population, but of future generations too. We believe that the only sure foundation for sustainable globalization and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.

It would be nice if everybody could grow and get richer.  Lets not forget about the poor countries that have been hurt even more than the rich countries by this crisis, even though it was not their fault.  However, we will not fundamentally alter the overall global economic system.

4. We have today therefore pledged to do whatever is necessary to:

• 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.

By acting together to fulfill these pledges we will bring the world economy out of recession and prevent a crisis like this from recurring in the future.

Nice set of goals.  However, what is meant by do “what ever is necessary” to repair the financial system.  Calls for stronger regulation of markets are good and very much needed.  The international financial institutions they are referring to here are the World Bank, the IMF and their regional counterparts.

5. The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.

This is a major increase in support for the IMF and is a very useful step.  It actually means that the calls to help out the poor countries that are suffering from this are not just platitudes, but that the major countries of the world are actually prepared to help.

Restoring growth and jobs

6. We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 per cent, and accelerate the transition to a green economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore growth.

I will note that the vast bulk of that $5 trillion is coming from a handful of countries, most notably the U.S. and China, with honorable mentions to Japan and the U.K. Continental Europe is effectively trying to free ride off the increased aggregate demand from the countries that are actively stimulating their economies. I would however read this clause as an endorsement of the Obama Strategy.

7. Our central banks have also taken exceptional action. Interest rates have been cut aggressively in most countries, and our central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability.

A pat on the back for the central bankers.  This is an explicit endorsement of the use of Quantitative Easing (central banks buying long term government bonds and effectively printing money) which is being implemented by the Fed and the Bank of England.  I would also see this as a call for the European Central Bank (ECB) help out a bit more.

8. Our actions to restore growth cannot be effective until we restore domestic lending and international capital flows. We have provided significant and comprehensive support to our banking systems to provide liquidity, recapitalize financial institutions, and address decisively the problem of impaired assets. We are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions, implementing our policies in line with the agreed G20 framework for restoring lending and repairing the financial sector.

We have thrown lots of money at the banks to keep the system afloat and are prepared to continue throwing money at the banks.

9. Taken together, these actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support programme for the financial sector in modern times. Acting together strengthens the impact and the exceptional policy actions announced so far must be implemented without delay. Today, we have further agreed over $1 trillion of additional resources for the world economy through our international financial institutions and trade finance.

Yes, it has been a lot of money we have thrown at the banks.  So far we have been helping out private commercial banks.  However given the scale of this problem we also need to significantly increase the resources of the IMF and World Bank (mostly IMF).

10. Last month the IMF estimated that world growth in real terms would resume and rise to over 2 percent by the end of 2010. We are confident that the actions we have agreed today, and our unshakeable commitment to work together to restore growth and jobs, while preserving long-term fiscal sustainability, will accelerate the return to trend growth. We commit today to taking whatever action is necessary to secure that outcome, and we call on the IMF to assess regularly the actions taken and the global actions required.

The sun will come out tomorrow.  We think this plan will work, but perhaps the IMF can give some progress reports from time to time.

11. 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. We are convinced that by implementing our agreed policies we will limit the longer-term costs to our economies, thereby reducing the scale of the fiscal consolidation necessary over the longer term.

We are sure we can pull back from the fiscal stimulus before it bankrupts us and from the monetary stimulus before hyperinflation breaks out.  You don’t get to be a head of state by lacking in confidence, and this was a meeting of 20 heads of state or government.

12. We will conduct all our economic policies cooperatively and responsibly with regard to the impact on other countries and will refrain from competitive devaluation of our currencies and promote a stable and well-functioning international monetary system. We will support, now and in the future, to candid, even-handed, and independent IMF surveillance of our economies and financial sectors, of the impact of our policies on others, and of risks facing the global economy.

If the independent surveillance of the economy by the IMF applies to the U.S. then this is big news.  More likely there are no teeth to this.  If the U.S were any other country, the IMF would have long ago pressed us to nationalize the banks, clean them up and sell them off.

Strengthening financial supervision and regulation

13. Major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our financial system. We will take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens.

Deregulation was a VERY bad idea when it comes to financial institutions.  With the world now interconnected more than ever before, regulations need to be strengthened and made more consistent across boarders.

14. We each agree to ensure our domestic regulatory systems are strong. But we also agree to establish the much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards, that a global financial system requires. Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking. Regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.

Everyone has to regulate, no trying to lure financial activity to your country by promising to look the other way when institutions take on excessive risk in the hunt for short term profits.

15. To this end we are implementing the Action Plan agreed at our last meeting, as set out in the attached progress report. We have today also issued a Declaration, Strengthening the Financial System.

In particular we agree:

• to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
  that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;
  to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;
• to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;
• to endorse and implement the FSF’s tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;
• to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;
• to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;
• to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and
  to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.

That is a long list of reforms and areas for tighter supervision.  Mostly it amounts to more international cooperation on regulation, in a more formal and institutionalized way.  The call for regulation and oversight of the Credit Rating agencies (i.e. Moody’s and S&P) is long overdue, as their lack of action and incompetence was a major factor in this whole mess occurring.  All big financial institutions, including hedge funds need to be regulated.

16. We instruct our Finance Ministers to complete the implementation of these decisions in line with the timetable set out in the Action Plan. We have asked the FSB and the IMF to monitor progress, working with the Financial Action Taskforce and other relevant bodies, and to provide a report to the next meeting of our Finance Ministers in Scotland in November.

We hope we can get our act together by November.

That is about half of the statement, I will have a follow up post on the rest of it.  In general the basic thrust of the statement is that it endorses aggressive government actions, both on the fiscal and monetary front to address the crisis.  It calls for much stronger regulation.  Perhaps the most significant news is a very large commitment to strengthening the resources of the IMF to help some of the emerging economy’s deal with the fallout of this mess that they did not create.

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