The G20 and Decisive Leadership

This weekend (15/16 November) the G20 met to control the credit crisis with decisive leadership. Wonderful things were committed to paper, including some sensible and less sensible intentions.

The G20 agreed that they will do everything in their power to tackle the crisis and the recession caused by the credit crisis. That is nice but we knew that. After all, governments have been intervening en masse for a while now and talking about generic regulations to stimulate the economy. It is no news either that they are willing to lower interest rates (incidentally, many a gentleman and one lady are not even authorized to do this) and support markets. But let’s not get too picky, the fact that the G20 has declared these things is good for morale.

Soon every dictionary will describe bonus payouts as a perverse reward system causing irresponsible risk taking. According to the G20, reforms are necessary. I suspect that some would have loved to use the verb to ban in this context. If you are seen to be averse to a ban on bonus payouts you will immediately be qualified as one of the money-grubbers. But I find it hard to believe there will be a regulation and even then I will only be impressed if it works.

They want more international collaboration between supervisors. That is a joke! How is that supposed to take shape? Naturally, the Americans are slightly submissive at the moment and they’ll have to collaborate, but that will diminish over time. I think psychologists will have a ball afterwards analysing why it was impossible to find a format for this collaboration. And if it did work, the psychologists will have as much of a ball finding out how it happened. However, more importantly, this is not the solution. First and foremost supervisors will have to look much deeper into the financial organizations to see what risks they are taking and if they are not too high. The seeds for the next crisis are somewhere on the work floor. I think it will be a devil of a job for supervisors to monitor this and I am sceptical about whether or not they will succeed. At least it is easy to predict the sector that will have an increased employment rate in the near future. This monitoring is even harder when various sectors are involved from several countries (even if it is a single institution). This will require supervisors to work together at a very detailed level. I am curious to see how that is going to be coordinated. G20 will come up with proposals at the end of April.

Incidentally, Sarkozy’s alternative – to establish a supranational supervisory body – is not necessarily the answer to the international non-cooperation of national supervisors either. His solution will face the same problems as international cooperation. What’s more, I can’t see the Americans passing over supervision of firms like Goldman Sachs and JP Morgan to such a body, let alone Sarkozy doing the same for Credit Agricole or BNP.

The credit rating agencies are also being dealt with, or at least placed under stricter supervision. This is quite easy from an operational standpoint, because there aren’t that many. However, what kind of supervision is needed? Do we need to look at the process, the criteria that are used, the models to weigh up the risks or at all of the above? And who will pay for it – the rating agencies themselves (in which case the money will come from the security-issuing institution)? The main problem was that investors put too much store on assessment by these agencies. Hopefully we’ve learned a lesson – it is very unwise to have blind faith in these institutions.

The Doha Development Round is going to be dusted off to stimulate free trade, and a moratorium on protectionist regulations has been declared. If there is anything that I am excited about, it is this. It was very disappointing when the Doha Development Round failed. Prevention of protectionism and stimulation of world trade is the best thing the G20 can do to support the world economy.

Oscar Couwenberg

Professor of Law and Economics