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Initial reactions to the G-20 summit are fairly positive. The communiqué and associated press conferences conveyed: (a) There was no open acrimony; (b) The body language was broadly supportive of countercyclical fiscal stimulus policies; And (c) there may now be a serious international regulatory agenda.
None of this is really new and it could all have been arranged by finance ministers (probably over the telephone), but I agree there is some useful symbolism in having heads of industrialized and emerging-market governments convene for the first time ever on these kind of issues.
I will admit to disappointment that no more explicit commitments were made to fiscal stimulus. I thought the British and the French were heading in this direction, and that they could create some momentum in the right direction. If Europeans (or anyone else) would like to compete for a "special relationship" with the United States after January 20, they might consider coming to the next summit, in April, with a substantial fiscal package in hand (as will President Obama).
If the latest rounds of global economic diplomacy were the Olympics, then China gets gold in the fiscal stimulus category, Germany gets silver, and the United Kingdom (so far) is the distant bronze—but the United Kingdom does get one more throw next week. Not the ordering of world economic leadership that one would ordinarily expect, but perhaps that's a good thing.
In the category of "largest cash contribution designed to save the world from serious disruption," Japan easily finishes first. Their $100 billion pledge to the International Monetary Fund (IMF) just before the meeting was timely, targeted, and hopefully not temporary. Sadly, there were no other entrants in this category. Perhaps the chemistry and cooking at the White House dinner on Friday will prompt further contributions in the near future.
But there is unfortunately another way to read the communiqué if you are a government or international official, for whom this text really is a set of instructions to be implemented. The whole first part of the document is generic and definitely not new. An official's eye would skip through that quickly. The real issue is the deliverables in the plan of action, with a pressing deadline at the end of March (this is pretty much like saying "do it tomorrow" to a government bureaucrat). This is where we—an official reader would be thinking—must concentrate our immediate attention and efforts. And most of these specific actions are about tightening regulation on and around credit, or beginning processes that definitely point toward many dimensions for this kind of tightening—accounting standards, hedge funds, risk disclosures, financial-sector assessments, credit-rating agencies, risk management and stress-testing models, international-standard setters, sanctions for misconduct, reporting to supervisors in different countries, and more.
There is, of course, nothing wrong with making regulation more effective. This is surely needed—in both the United States and Europe, and probably elsewhere—to help lower the odds of another global financial crisis developing in the future.
But we are still not out of this crisis. And tightening regulations quickly in the midst of a worldwide credit crunch is one good way to make sure that credit contracts further and faster. Lending standards naturally tighten in a crisis. The issue to address going forward is how to prevent standards from loosening too much in the next boom, which is at least several years down the road. I am in favor of starting early, but I do not like precipitate action just because you want to look busy and you could not agree on the more pressing issues, such as fiscal policy, support for the IMF, shoring up the eurozone, and so on.
It is true that one (among many) of the stated principles is: "Mitigating against pro-cyclicality in regulatory policy." But that is a general statement that is not mapped into operational requirements—except that the IMF and Financial Stability Forum (FSF) should work together on this, which is a good way to make sure it doesn't happen. What officials have to deliver on, by the end of March, is substantive progress regarding tougher and tighter regulation of credit. There is a real danger that this action plan—within such a short time frame—can actually make the global downturn dramatically worse.
This article was also posted on Mr. Johnson's blog, Baseline Scenario.com.
