Global Economic Challenges

September 25, 2009
The New York Times

EDITORIAL
Global Economic Challenges

Leaders of the Group of 20 are in Pittsburgh this week for their third meeting since the financial crisis erupted a year ago. It is likely to be a positive gathering, with the leaders from the developed and large emerging economies sharing credit for avoiding the economic abyss. It will take a lot more than that, however, for the meeting to be a real success.

The previous two meetings were about projecting the ability and willingness to work together, which was a laudable goal last November when the markets were paralyzed and the global economy was in a tailspin, and, in April, when economies worldwide were still slumping badly. To quell panic generally, the G-20 leaders needed to show a united front. To ease specific fears that they would repeat the mistakes of the 1930s when protectionism prolonged the Great Depression, they needed to assert a commitment to open trade.

They succeeded in ensuring that conditions did not worsen because of actions they took or failed to take, but they did not confront the causes and cures of the financial crisis. In fact, they were successful largely because they stuck to the side effects of the crisis, like the harm to emerging markets, while avoiding the thorniest issues, like the dangers posed by too-big-to-fail institutions. Serious disagreements, like the proper size and role of fiscal stimulus, were papered over.
The question now is whether the G-20 can start to reach consensus on such vexing and divisive issues. If not, regulatory reform efforts of individual nations will be hobbled because nearly every pressing matter — cleaning up toxic assets, regulating derivatives, downsizing large and interconnected firms — has an international component. If reform efforts are hobbled, there is little hope of avoiding a repeat of the financial crisis.

The signs, so far, have been mixed at best. The leaders are likely to agree on the need to impose higher capital requirements on banks and other financial firms. That is important as a general statement, but real reform will require an agreement on substantial increases in capital levels, as well as on how capital will be measured and how the new rules will be enforced.

A consensus is also expected on how to regulate pay for financial industry executives. Skewed compensation incentives clearly drove some of the reckless risk-taking that led to the crisis. But pay reform is just a stopgap. It’s more important to enact reforms to ensure that banks can no longer engage in primarily speculative activities or other excessively risky transactions that lead to outsize paydays. Such reforms would include curbing the use of leverage and of opaque derivative trades to boost gains.

The G-20 is also expected to reach an agreement on ways to correct the crucial long-term issue of global imbalances that created the conditions for a global upheaval. In brief, the United States must reduce its budget deficit and boost household savings. China must invest its reserves in its own social safety net and thereby increase consumption, which would inevitably involve revaluing its currency.
But the leaders must not allow that to obscure more pressing concerns: The United States must clarify where it stands on open trade, having shaken faith in its stance by its recent imposition of tariffs on imports of Chinese tires. Large nations in the G-20 must commit themselves to continued government support of the world economy, including investment in poor countries and more stimulus spending for their own economies.

The United States appears to have little appetite for more stimulus spending, even though unemployment is rising. The commitment to stimulus in Europe, particularly Germany, has long been too weak, putting undue pressure on economies that have been willing to do more to boost demand.

The time has passed for consensus for the sake of consensus. It’s time for reform.