London Econ Summit: Born of Good Intentions, But Ends in Disastrous Results
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The governments of twenty of the largest economies in the world walked into the London summit asking many of the right questions, but walked out with an action plan that takes the world three giant steps backwards in terms of what's needed to make the shift from casino economies to healthy ones.
Leading up to the London summit, there were serious discussions about the need to do three big and positive things:
- A global green stimulus: The U.S. government, after passing a huge economic recovery bill that is getting resources to millions most hurt by the crisis and which is finally beginning to create some “green” jobs in this country, called on nations to coordinate large green stimulus plans.
- Global regulations to close down the casino: The German and French governments rang the alarm bells about hedge funds and the volatile financial instruments that have turned banking and finance into an unregulated casino, and they called for a new international regulatory framework.
- A North-South transfer: Governments in rich and poor nations alike acknowledged that a crisis that began in richer Northern countries had spread like wildfire to poorer Southern nations and that there should be some North-South resource transfers to help poorer nations adapt.
In many ways, governments were asking the right questions. Yet, they walked out of London after failing to advance the first two objectives and picking the worst possible institution to carry out the third. How did this happen?
Let’s start with the third objective: the North-South transfer. No global economic institution has caused more pain over the past 30 years than the International Monetary Fund. The IMF has long operated like a medieval doctor who has only one remedy to any ailment: stick a leech on the patient and bleed him. Indeed, there is widespread agreement among many noted economists that the IMF’s fiscal austerity measures deepened the Third World debt crisis that erupted in 1982, the Asian crisis of 1997 and the Argentine crisis of 2001-2002. And little has changed. According to Jubilee USA, in the past few months, IMF emergency loan conditions have required El Salvador to increase taxes and cut gas and transport subsidies and forced Latvia and Hungary to slash government employees’ wages.
There are alternatives that would get relief more quickly and effectively to poor nations. Many of the poorest still need cancellation of external debts. And, there are new regional funds emerging in Asia and Latin America that could transfer resources without the stigma and onerous conditions that often accompany IMF loans. Hundreds of citizen groups are calling for the creation of a Global Climate Fund under the United Nations that could transfer resources to help nations leap over destructive fossil fuel economies to clean energy economies. Yet, the Group of 20 governments opted for the same old choice, without even forcing the IMF to prove it had learned the lessons of the development fiascos of its past.
Why would Barack Obama knowingly write a blank check to an organization that will effectively prevent many poor nations from participating in the global green stimulus that he's long advocated? In part, we blame U.S. Treasury Secretary Tim Geithner, a former IMF official, whom Obama picked for the job.
Next, to the second good intention: putting regulations on the global financial casino. Again, Tim Geithner and the mindset he represents prevented real progress on this front. In many ways, the financial mess that has engulfed the world is the result of a blind faith -- that began with Ronald Reagan and Margaret Thatcher thirty years ago -- that markets could solve all problems and that they could regulate themselves. Under that “market fundamentalist” worldview (to use George Soros’s apt phrase), the U.S. and European governments went about dismantling the regulatory framework that kept banks small and focused on their original and still useful purpose: to fund real economic activity on “main street.” Left unsupervised, they grew into vast unregulated casinos where CEOs pursued short-term personal windfalls of unprecedented sums.