Sep 26 2009
G20 result – great aspirations, poor delivery, wandering attention
If only a communique could put things right, we are now on course for sustained growth, well behaved banks and benign regulation. At the centre of the Summit Report were two propositions that make a lot of sense. The G20 will continue with stimulus measures to encourage recovery, whilst withdrawing them at the right pace to avoid inflation and other problems ahead. They envisage a seamless transition from extraordinary measures and public sector demand to normal policies and private sector demand. At the same time they will put in place a counter cyclical way of regulating banks, to allow more lending in the bad times and to rein them in the good times.
If only.
As so often, the question to ask is not do we share the aims, but what do we think of the actions to achieve them? Have they proposed a method to create this new successful economic world? I fear not.
High up the list of statements in the Preamble they write
“We pledge to avoid destabilising booms and busts in asset and credit prices and adopt macroeconomic policies consistent with price stability…”
Yet the UK and US policies of printing more pounds and dollars, coupled with other Central bank expansionary action in China, India and even to a lesser extent the ECB was creating a surge in share and commodity prices in the run up to their meeting. The UK policy of pushing the pound down by low interest rates, unhelpful comments from the Governor, printing more money and malign neglect of the currency is not trying to keep prices stable and is bound to push inflation up.
In their statements on regulation there is an important development. They now admit that “Major failures of regulation and supervision…..contributed significantly to the current crisis” That is great news. Leaders need to accept and understand their governments’ mistakes before they start to remedy them.
The bad news is they still do not seem to understand that it is low interest rates – and printing money – which causes price bubbles. They go on to say
“We have agreed to improve the regulation, functioning and transparency of commodity markets to address excessive commodity price volatility”
The simple reason commodity prices went through the roof in 2007 and early 2008 was excess credit and money. The reason they fell through the floor in the latter part of 2008 and early 2009 was too little money and credit. The reason they are surging today is the very easy money authorities have created in some parts of the economy. Investors and speculators fear renewed inflation on current policies and see commodities as a store of value that governments cannot devalue.
The need to accommodate the different views of the US and the EU on regulatory matters created a series of catch all pledges. New regulation of capital (necessary) is to be added to new protection “against market abuse” and the promotion of “higher quality standards”, leaving future architects of the detail free to draw up as many new rules as they like.
The key issue they do mention is banking capital. We had banking excesses on low capital in 2005-7 because the regulators failed to keep proper control of how much big banks could lend. The Communique says it realises this now. Unfortunately their answer is to soldier on with Basel II. Readers of this website will recall that Basel II rules were the ones which told Northern Rock on the eve of their collapse they had too much capital or too little lending! We are promised a new leverage ratio on top of the lax Basel rules. No-one has yet worked it out, so watch this space. It might be ready by 2012.
The Communique reads as you might expect from a large gathering of interests with different views, where the attention of the main players has moved on to Iran. There is nothing here to make one believe these Leaders have sorted out the existing problems let alone prevented another crisis. There is no engagement in the communique with the following vital issues:
1. How do the debtor countries get out of their deficits?
2. At what pace will the money printers get onto a sounder footing?
3. What are they going to do about the new asset price bubble emerging in some markets?
4. How do they switch demand from public to private sectors?
5. What is an appropriate level of capital for banks today, both to ensure enough confidence whilst at the same time allowing some more lending to the distressed private sector?
6. Can’t the UK see that it has public sector plenty and a private sector squeeze? How do they intend to make the financial system work for all parts of the economy today?
7. How are the saving countries like Germany, Japan and China going to expand their domestic demands?
15 Responses to “G20 result – great aspirations, poor delivery, wandering attention”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
According to the media reports, the G20 meeting seemed to be all about Iran’s nuclear developments. Strange how this dominated the news when it wasn’t even a totally new revelation and followed the UN meeting when it could have been raised. Just another aspect of the political conjurers at work distracting our attention from the things they don’t want us to know about.
All good questions JR, but the problem is much more fundamental. Central-bank-led fractional-reserve system of banking; has it passed its sell-by date? Two pertinent articles at Mises are worth a read.
http://mises.org/story/3662
http://mises.org/story/3687
james harries Reply:
September 26th, 2009 at 9:39 pm
Good post Acorn, thanks for the link.
Only problem is:
Fractional Reserve banking is the only alternative to mattress banking.
How in the von Mises world (and btw, he’s a hero of mine) are we to redirect capital to its most fruitful investment? Banks and central banks may be deficient, but so far they’re the only way for this to happen.
Without fractional reserve banking we can have no loans. (The money’s all left in the vault or the mattress)
So a better question might be “What is the prudent reserve?” Well, in good times maybe 5%, and in bad times maybe 99% would be insufficient. And who knows when the times change?
All the politicians have since 2008 become banking experts, and are demanding two things: more loans; and more reserves. Eh?
Still, on the bright side, think of all those things the G20 communiqué might have said but didn’t.
“…We pledge to avoid destabilising booms and busts in asset and credit prices and adopt macroeconomic policies consistent with price stability…”
There must be some mistake, Gordon said he did this 12 years ago and went on to boast about it for the next decade.
Same old song much?
james harries Reply:
September 26th, 2009 at 9:49 pm
Rumour has it that Nomoreboomnbust wants to run the G20 an is sending over Shrieky Vadera to keep the chair warm for him…
Stuart Fairney Reply:
September 27th, 2009 at 9:29 am
It never ceases to amaze me how poiticians live in a different world to everyone else. If you were an airline pilot with a record of crashes on your CV, then no amount of denials, blaming the Americans, sulking and ‘not my fault gov’ statements would mean you would get the job. Yet, GB thinks he can make up a pointless institution, rape taxpayers to fund it and just walk into another job that he is wholly unsuited to.
Time to take my pills before my head explodes. I wish to make clear I am not taking pills, they don’t affect my ability to do my job and anyway I’ve already answered that question. So there.
james harries Reply:
September 27th, 2009 at 6:14 pm
new rumour: the saviouroftheworld (no, not him, him) is going to resign on health grounds before the election, so that he can’t have a resounding defeat on his cv, and so that despite failing health, he gets an international sinecure as the first paid general secretary. Words fail me. Pass me the pills, nurse. No, on second thoughts, pass me the axe.
Why is the British government about ten months behind this blog?
Stuart Fairney Reply:
September 27th, 2009 at 3:57 am
I’m going to take a stab and say they are slow readers who take a while to digest the unpalatable truth
Good questions, but none of them have the answers.
The G20 will continue with stimulus measures to encourage recovery, whilst withdrawing them at the right pace to avoid inflation and other problems ahead.
Over 1000 yrs we have had Banks, it’s such a simple idea, they should be places where people can store their wealth.
Every few years though it seems things go wrong, why, because our Banks are headed by (adventurers-ed) who along with Govt engineer events so that they can transfer our wealth upwards into their vaults.
They do it behind smoker and mirrors of course but at the end of the day when someone deposits their £1000 no way have they ever agreed that the Bank can lend out £10,000 on the back of that deposit.
It’s (not right-ed)
The entire western financial system is run by and goverened by (people who should stand trial for their actions-ed), and yes, Give me a Jury of 12 under common law Jurisdiction and I’d happily say that in court.
The “pledges” given at the G20 seem to have about as much validity as Tony Blair’s pledge to improve education and Gordon’s most recent pledge to have cancer screening for all within a week of referral!
I think that the general public has reached the stage where they no longer believe any pledges by politicians on the basis that actions speak louder than words!
Asset bubbles and commodity prices.
The biggest asset bubbles recently have been in landed property so something like Schedule A (better LVT) should be re-introduced on property to reproduce the flat house price era of the 50’s and 60’s in the UK .
Keynes’ major architecture included international Commodity Controls or buffer stocks to place beside the World Bank and IMF.
This idea was rejected though it was very simple: an international body should buy up commodities when prices were low and then release them during price bubbles. Early versions of the idea, going back to the 20’s, talk about national buffer stocks.An interesting and well-written paper on the subject called Speculation and Buffer Stocks by some Italian academics is on the Net.
Keynes probably needs reavaluating as his whole contribution on international trade on which he was an expert being a successful commodity speculator is less well-known though he obviously thought you could not have Keynesianism in one country.
Would we be in this position if we still had our Fishing Grounds, a Car Industry, steel and Ship building, If our Farming were left alone, our Armed Forces at full strength.
Now we have a Global Credit Crisis requiring Global not National Solutions, a Global Pandemic requiring WHO and UN regulations be adhered to, a Global War on Terror requiring Global Inteligence and Militrary operations, and global Warming requiring us all to pay global Carbon Taxes.
Is there a pettern here, Destroy the Nations states and Set up Global Government to replace it.
Is it all Just Coincidence.
Kennedy Speech on a Global Conspiracy
http://www.youtube.com/watch?v=_WSGwnz7XpY
Chemical Dumbing Down, Huxley, HG Wells
http://www.youtube.com/watch?v=2OlPrySsjgY
Ron Paul’s comments on the G20
http://www.youtube.com/watch?v=b7j-s5ujYJ8
At the end of the day Banks should be there to serve our Society, presently they are feeding off us.