In fact, many people are misreading this time and ignoring the lessons of the past crisis.
A joint commitment –and a dispute– will be in the Pittsburgh agenda for the G-20 leaders.
The draft commitment is only too vague –in the same vein as the commitments articulated in London: to keep the so-called stimulus packages in place to spur the fragile economic recovery, and continue to implement coordinated policy measures in order to lay the basis for sustainable growth and to avoid a repetition of the present financial crisis.
One should remember that the “coordinated measures” agreed on in London turned out to be just large rescue packages for the banking and financial system, along with domestic consumption fiscal stimuli each country implemented its own way, with different degrees of success.
Also to be remembered is the fact that during the last few months, the G-20 members, recanting their commitments, adopted 100+ protectionist measures, with over 90 percent of the world traded goods being affected by some types of such measures.
In light of the above, little ought to be expected from Pittsburgh’s new commitments in terms of global cooperation and solutions to urgent crucial issues, such as unemployment, hunger, and destitution, which mainly plague the small developing countries.
The dispute item of the agenda, in contrast, is clear-cut, and revolves around effective financial regulation. Europe is pressing for concerted reforms, but all President Obama has done so far is asking Wall Street to please change its business practices.
Hesitations, at this conjuncture, on the need for reforms are startling. By now, no one can doubt the dubious practices of the financial industry are to be blamed for the global disaster.
Dr. Joseph Stiglitz’s remarks, a year ago, were supremely eloquent:
“The financial crisis is fruit of dishonesty, is the fruit of a pattern of dishonesty on the part of financial institutions, and incompetence on the part of policymakers.
We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures - yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.”
Years ago, the crises in developing countries and emerging economies elicited a protracted debate on the “moral hazard” imposed upon crisis countries by IMF’s emergency rescue programs.
IMF “rescue” packages were described as a source of moral hazard, meaning the risk of a new strain of country over-indebtedness, or the risk of pursuance of unwise, reckless economic policies leading to another crisis by countries that take Fund support for granted if things go wrong. Besides, IMF aid conditionality entailed the implementation of adjustment and reform programs, on top of loan repayment, by the borrowing countries.
During the 2002 Argentinean crisis, IMF First Deputy Managing Director Anne Krueger threw up the idea that countries can go bankrupt:
“Defaults are always painful, for debtors and creditors alike. And so they should be. Countries - just like companies and individuals - should honor their debts and suffer when they fail to do so.”
Today’s bankers are in a much better condition than crisis countries. Bankers are not even expected to implement adjustment programs, and were rescued because no one even dared to imagine a world of massive financial crises –or seemed to care for the problem.
The message, to the financial institutions, was plain enough: yes, they are too big to be allowed to fail, and will not be called to bear the costs of their unhealthy business practices even if they relapse in their ways. Furthermore, rescue funds were delivered with strings attached. In fact, the nine largest U.S. banks which received altogether US$175bn in taxpayer-funded bailouts paid a total of US$32.6bn in bonuses, mostly to top executives, in 2008. This amount alone is the equivalent of all the debt of the most heavily indebted poor countries (HIPC).
The financial sector lobbies seem to have surfaced stronger than ever, bluntly rejecting any regulation measures whatsoever, and pursuing foggy maneuvers to shun them.
A group of 45 bankers at Barclays bypassed potential curbs on pay and bonuses by jumping ship to set up a Cayman Islands company and manage $12.3 billion of Barclays’ most toxic debt. In an exotic piece of financial engineering, the bank will lend $12.6 billion to Protium, a newly-created Cayman Islands-registered hedge fund, to buy the toxic assets.
The “G-45” bankers were not alone in such moves. Dozens of leading bankers at Société Générale have left to set up a new hedge fund, against a backdrop of pressure on French banks to cut bankers' bonuses. A source within SocGen said this political climate could encourage top financiers to leave large banks and go off and set up their own outfits where they can dictate their own remuneration policies.
The UK Prime Minister Gordon Brown said that he was "appalled" that some financial firms had been continuing or even extending their bonus culture
And seven European countries on G-20 leaders to put together strict limits on bonuses to bank executives. We have to stop some financial actors from returning to the same destructive behavior as before,” they wrote. “We have to be very clear: this behavior is not just dangerous, it is indecent, cynical and unacceptable. It is a punch in the face of all the people who are quickly becoming unemployed.”
“Political leaders need to do much more than just condemn this kind of behaviour. They need to show the world that they are prepared to govern in the interests of all,” said ITUC General Secretary Guy Ryder.
An unlikely scenario in the impending Pittsburgh caucus.
Raúl de Sagastizabal
International consultant
Montevideo, September 21, 2009
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