Off Balance
Page 20
That afternoon, the G7 finance ministers and central bank governors met at the US Treasury, and after scrapping a humdrum statement drafted by their deputies they issued an enormously consequential communiqué based largely on suggestions from the Fed’s Bernanke. The G7 agreed to “take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.”13 By promising that there would be no more bankruptcies of financial firms on Lehman’s scale, this language effectively meant that major governments were socializing the risks of the financial system.
13 G7 (2008). “G7 Finance Ministers and Central Bank Governors Plan of Action,” October 10, available at: www.g8.utoronto.ca/finance/fm081010.htm.
Equally important, government policies were converging around the approach conceived by the British for propping up banks. Thanks in part to the British lead, and in part to persuasive arguments by Bernanke, Paulson had accepted the idea that direct injection of US government capital into major American financial institutions was necessary. Darling flew back to London to put the finishing touches on the British plan, which would entail confronting bank executives still resistant to the terms. To bring other European governments around, Gordon Brown flew to Paris on October 12, where leaders of euro-zone countries were holding a summit, and made an impassioned plea for concerted action. “I explained that Europe’s banks were under-capitalized by billions and that the prospect of them collapsing jeopardized the safety of the entire European economy — we could not run capitalism without capital,” Brown later recalled. “I remember the skeptical looks when I explained that European banks were in fact more vulnerable than American banks, that they were far more highly leveraged and far more dependent on short-term wholesale funding. In fact, half of America’s toxic sub-prime assets had been bought by reckless institutions in Europe.”14 The reactions from the chastened Europeans, and a stirring promise from French President Nicolas Sarkozy that he would follow Britain’s lead, provided heartening evidence that Brown’s words had produced the desired effect. The following morning, after flying back to London, Brown unveiled the details of his government’s bank recapitalization plan — an injection of £37 billion into three major banks — with the following words: “This is the first government to do what a large number of governments are going to do over the next few days.” Dramatic evidence of the accuracy of that statement promptly materialized: a few hours later, the heads of nine major US financial institutions met with Paulson at the Treasury and agreed to accept government investments.
14 Gordon Brown (2011), “Saving the Euro Zone,” International Herald Tribune, August 15.
So, in the end, the global financial system managed to recover from its near-death experience in the fall of 2008. No international institution could have achieved such a result on its own. The involvement of national officials at the highest level — right up to heads of government — was essential. The G7 statement required the signatures of finance ministers and central bank governors; the bank recapitalizations required the assent of prime ministers and presidents.
But Draghi was surely onto something when he spoke at the Amsterdam meeting of September 29 about how helpful it would be to have a body dedicated to international coordination during a crisis. At the very least, such a body could help the dissemination of information, correct misunderstandings and ease suspicions. At best, it could help keep countries from taking measures that have destabilizing effects outside their borders. Of course, such a body would need members who showed up, and that was something the FSF lacked in Amsterdam that day.
Trying Again, Only Harder
Anyone with a penchant for devil’s advocacy could make the argument that once the crisis was over, the FSF should have been abolished, with no successor body created. If the leaders of the international community had been so inclined, they might have acknowledged, with regret, that the FSF had proven incapable of fulfilling its mission of spotting vulnerabilities to the global financial system; therefore, continuing to maintain this sort of group did not serve much useful purpose and might interfere with more productive approaches.
Such a decision would have been awkward to say the least, especially since Tim Geithner, who had attended so many FSF meetings, was becoming US Treasury secretary. It also would have been unfair. The FSF’s failings in recognizing vulnerabilities were essentially the same as those of many other policy-making bodies. In addition, the forum had made a valuable contribution to global public policy with the reports that it had prepared after the outbreak of the crisis. The April 2008 report may not have been as bold as it should have been, but it set an international agenda for both standard setters and national governments that the G20 has largely followed. If this was as far as policy makers in the various major countries were prepared to go at the time, there was probably no better way of assembling the best minds and generating the best recommendations than doing so within the small committee that Draghi formed. A report of that nature was certainly needed at the time it was issued.
It also would have been foolish to abandon the FSF concept altogether. When a venture in international cooperation fails, it doesn’t necessarily mean that the countries involved are completely incapable of working together on the issue in question in a mutually beneficial way. It may mean that they need a more robust cooperative arrangement — in other words, they need to try again, only harder. That should be the first option under consideration. In most cases, even if it doesn’t work, it’s preferable to the alternative of just giving up.
That, of course, is what happened with the FSF — it received a much broader remit, as well as other sorts of fortification. Other international institutions did the same. Whether these steps are commensurate with the challenges still confronting the global financial system is the big question that must be addressed next.
9
Still Wanting
A Reasonably Shocking and Awesome Start
Along the River Thames, in London’s Docklands area, stands the ExCeL Centre, a cavernous, hangar-like edifice of concrete and metal that has hosted, among other events, the London Boat Show, Star Wars Celebration, Europe and Accountex, an accountants’ convention. Although the setting lacks majesty, it was here that economic cooperation among the world’s most important countries reached its zenith, when the leaders of the G20 major economies met there on April 2, 2009. Never before during the global financial crisis, and never since, has an international body produced an outcome to such salutary effect.1
1 For much of the historical material in this section, see Rawnsley (2010), The End of the Party, chapter 36; and Seldon and Lodge (2010), Brown at 10, chapter 6. Additional detail comes from interviews I conducted with a number of participants.
Rather than stage the G20 summit at, say, an English country estate, UK officials deliberately chose this functional venue to avoid the appearance of extravagant revelry at a time when worsening financial conditions were eroding the living standards of millions around the world. The global crisis, which had seemed to abate in the fall of 2008, was intensifying anew in the early months of 2009 amid signs that the world economy could be heading into a 1930s-style death spiral. Even in Asia, where banks had gone relatively unscathed, production of goods and services was contracting at rates unseen for decades, as demand for the region’s exports fell precipitously. Japan’s GDP was estimated to have shrunk at an annualized pace of 10 percent in the fourth quarter of 2008, and South Korea’s at 21 percent; the Chinese economy was still growing, but just barely. Financial markets were convulsing accordingly. The Dow Jones Industrial Average, which had sunk to the seemingly unfathomable 8,000 range in the fall of 2008, closed at a 12-year low of 6,547 on March 9, 2009. Reversing this dynamic would require a show of “shock and awe” by the G20 — of that both market players and leading policy makers were convinced.
The G20, it will be recalled, dated back to the late 1990s, and was originally intended to bring together finance ministers
and central bankers from advanced and emerging nations, in the hope of giving a fillip to market-oriented reforms in the developing world. Never attaining decision-making powers, the group had puttered along in obscurity and virtual irrelevance, often straining for topics to put on its agenda. Its sudden, spectacular ascent in importance was attributable to a decision in October 2008 by the Bush administration, which was besieged by demands to call an emergency summit of world leaders and, after concluding that this idea had merit, needed an appropriate list of invitees for a meeting to be held in Washington. Since by that point, the G7/G8 was obviously a body whose time had passed, the question was which other countries belonged at the table. One proposal — adding the leaders of China, India, Brazil and Mexico to the G8 — offered the advantage of limiting the number of participants, but officials with long experience in international meetings warned that inventing a completely new group would lead to endless wrangling and bitterness among those left out. In other words, the G20, although too big and with less than ideal membership, was chosen for the simple reason that it already existed, making it easier to explain their exclusion to non-invitees. (Among the disadvantages, from US officials’ perspective, was the prospect of having to deal with Cristina Fernández de Kirchner, the fervently leftist president of Argentina, a G20 member. She fulfilled their expectations at the first summit, which took place on November 15, 2008, by unleashing a 20-minute tirade against capitalism, going well over the seven-minute limit set for each leader.)
For Gordon Brown, a prime minister who relished playing the world’s “Chancellor of the Exchequer,” the London summit was to be the ultimate test of his ability to perform that role, as Britain’s hosting of the meeting entitled him to chair the proceedings. In the weeks leading up to the gathering, Brown was scouring newspapers, blogs and a host of other information sources for ideas, and driving his aides crazy by inundating them with emails, often in the middle of the night. He travelled over 27,000 km in five days, visiting capitals on three continents in the hope of lining up support for approaches he favoured, all the while consulting closely with officials of the newly installed Obama administration, such as Larry Summers, who was then chairman of the White House National Economic Council. Hanging over the proceedings were recollections of a much earlier meeting in the same city, the London Economic Conference of 1933, whose disbandment by the 66 participating nations after weeks of talks was one of the most storied breakdowns in international cooperation during the Depression.2 Keenly aware that a similar failure, or even a disappointingly modest agreement, might spark a fresh bout of destructive market turmoil, the G20 finance ministers and Sherpas — representatives chosen by the leaders to represent them in negotiations — hammered out tentative deals in advance on a long list of items to be included in the summit communiqué. But fierce disputes erupted over several major issues, in particular how much fiscal stimulus the major economies ought to undertake, with Germany (backed by France) staunchly resisting Anglo-American pressure to go further.
2 Although the collapse of the 1933 conference is often lamented, the proximate cause was a caustic message from President Franklin Roosevelt, whose stance was not unreasonable, as the participants were blundering their way toward a return to the gold standard. No less an authority than Keynes praised Roosevelt as “magnificently right.”
International summits are almost always tightly scripted affairs, with the leaders showing up to make their talking points and give the hard-fought communiqué their formal blessing. Not this time. Late the night before the summit, a meeting of Sherpas and finance ministry deputies broke up in disarray when Jon Cunliffe, the UK Sherpa, shocked his counterparts with the announcement that the communiqué would have to be significantly overhauled because, he said, a preliminary leaders’ dinner had ended in an impasse. The outcome would hinge on the leaders themselves making key decisions during the meeting — a nerve-wracking prospect to many of the officials involved. Using his mastery of detail to supreme advantage, Brown was able to bridge differences on the stimulus issue with German Chancellor Angela Merkel in the morning, and began bulldozing his way through the rest of the text, at times ordering everyone except leaders and their interpreters out of the room in a bid to avoid dissent. He very nearly pushed too far, provoking such an uproar as to risk a rebellion. “These last-minute changes are not necessarily understood by the politicians we are,” fumed Argentina’s Kirchner, who said she would sign only “with reservations,” according to notes of the meeting taken by a participant. Even more defiant was France’s Sarkozy, who prior to the summit had loudly targeted offshore tax havens as a major source of the world’s financial ills (the lack of evidence for their role in the crisis notwithstanding). The meeting notes, which describe Sarkozy as visibly emotional, record him as declaring, “I will not sign unless the communiqué mentions a list of tax havens” — a stance that also came close to wrecking the consensus because China would not allow Macau, one of the havens on the list, to be “named and shamed” in such a way. To everyone’s relief, President Obama draped his arm over Sarkozy’s shoulder, calmed him down and brokered a face-saving compromise with Chinese President Hu Jintao.
In the end, the summit produced a result that dispelled the memories of 1933 and approximated shock and awe closely enough to impress markets. Among the most important elements was an agreement to triple the IMF’s lendable resources, from US$250 billion to US$750 billion, giving the Fund additional firepower to combat crises that were flaring in Eastern Europe and threatening to spread elsewhere, in particular Latin America. The G20 also authorized the issuance by the IMF of another quarter of a trillion dollars in its quasi-currency, Special Drawing Rights, to help ease shortages of liquidity in many parts of the world. These moves, combined with other steps to enhance the IMF’s clout, marked a near 180-degree turn from the efforts that had just been completed a year earlier to downsize the Fund. Strauss-Kahn’s pithy comment to the press — “Today is the proof that the IMF is back!”3 — reflected the jubilation he and his underlings felt at no longer having to contend with questions about whether the world needed their institution.
3 Mark Landler and David E. Sanger (2009), “World Leaders Pledge $1.1 Trillion for Crisis,” The New York Times, April 2.
Another achievement of the London summit, the transformation of the FSF into the FSB, made much less of a splash in world headlines, because its significance was harder to discern and slow to unfold. A close look at the body’s charter provided clues regarding its new degree of muscularity. Membership in the FSB would entail obligations that did not apply before; member nations would commit to observe internationally agreed financial standards and they would undergo periodic peer reviews of their financial systems as well as scrutiny by the IMF’s FSAP. (The United States, which had long refused to undergo an FSAP, finally had one in the fall of 2009.) Moreover, the FSB would have considerably greater influence over standard-setting organizations than its predecessor.
The very fact that the London summiteers represented the G20 economies was another major step toward more effective global governance, by driving more nails into the coffin of the G7-dominated system. Membership in most major regulatory bodies, including the FSB and Basel Committee, was also expanded to include G20 representatives, a decision that stemmed, in large part, from the emphatic insistence of the Brazilians. Having gained a seat at the G20 leaders’ table, Brazilian officials were in a position to demand not only membership on the FSB but also first-class status for themselves and the other BRIC nations. Well aware that each G7 country had three FSB representatives, Brazilian officials said they would accept nothing less than parity with the G7 — which meant that the same number of members would be accorded to Russia, India and China. (Other developing countries in the G20 got fewer FSB seats.)
Matching the level of cooperation attained at the London summit is a goal that has eluded the G20 ever since. Indeed, many observers have lamented how much steam the effort lost once the common thre
at facing all the G20 member nations began to dissipate. That said, the G20 and other major international institutions have hardly been idle in the period after April 2009. They have initiated a number of steps to bolster prospects for recovery and improve the soundness of the global financial system. Although serious concerns have arisen about whether some of these initiatives are being implemented thoroughly at the national and international level, the list is impressive for its breadth and substance. The following are the most important:
The G20’s scheme to promote the reduction of global imbalances. Launched at the Pittsburgh summit in September 2009, the “Framework for Strong, Sustainable and Balanced Growth” features a broad agreement that countries with current account surpluses should boost domestic demand, while deficit countries should promote savings and curb fiscal deficits. The novel part of this undertaking is the MAP, by which G20 countries subject each other’s policies to a type of peer review, with the IMF providing technical analyses of the countries’ policies and the compatibility of those policies with global interests.