London Econ Summit: Born of Good Intentions, But Ends in Disastrous Results
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.
The French and German governments understand this story and they proposed a new international regulatory system to close down the casino. U.S. and British officials resisted, revealing again that the U.S. Treasury department still doesn’t understand that this global crisis cannot be fixed through national measures. Economist Jagdish Bhagwati captured this limited worldview well in his phrase: “the Wall Street-Treasury complex.” Hence, the London communiqué takes only a few small steps in the direction of the real regulations that the United States and world need to embrace.
Finally, to Barack Obama’s very good instinct that the world needs coordinated and green government stimulus packages. Here, the summit failed in a cultural clash between healthier European social democratic societies and the U.S.-British model of societies that leave behind those who are suffering the most. In the crisis-ridden Europe of today, most ordinary people are doing a lot better than their American counterparts. Education, heath care, and pensions for older people -- the so-called social safety nets -- are largely guaranteed by government (although less so than a quarter century ago) at great expense, even in times of crisis.
In the United States' version of capitalism, these things are left largely to the market. We have a lot to learn from the Europeans and in some ways, Obama's domestic stimulus plan was actually an acknowledgement of the need to get some money to tens of millions of people who are homeless, on the verge of homelessness, or in terrible economic distress. Yet when Obama asked for a global stimulus, most European countries were contemptuous of the United States lecturing them on the need for bigger economic recovery plans; they already have them in the form of these “social safety nets.” The other countries that desperately need such safety nets are in the global South, and the choice of the IMF as the financial transfer mechanism typically prevents the countries in crisis from creating them.
Add all of this up and you get major failure at a crisis moment. The critical need to transform our economies from giant unaccountable firms and casino finance into rooted economies where finance serves real production in a fashion that is “green” and just and aids the transition to clean energy was not heeded. Too many in the U.S. government still haven’t fully rejected the market fundamentalism of this last era, as bankrupt as the ideas have turned out to be.
Failure also grew from the fact that the venue was wrong. While getting the 20 largest economies together is a step better than the old forum of the world’s seven biggest economies, it is not representative of the needs of the majority of poorer nations. Instead, the United Nations has created a commission under the able leadership of Nobel laureate Joseph Stiglitz that has laid out a concise plan to shut down the financial casino and begin the transition to healthy economies. It includes a call for a "Global Coordination Council" that would broadly coordinate global economic and financial reform. It deserves attention and support.
Alas, up until the summit, Barack Obama had been making a strong case to the American people about new roles for the U.S. government to stimulate and regulate economic activity. The London summit represents a step backward for such an activist government role.