President Barack Obama's first international conference is less than two weeks away, and the stakes could not be higher. The Group of 20, representing the world's 20 most influential nations, will meet in London on April 2, to seek a common strategy for heading off a second global depression.
Almost 76 years ago, in June 1933, leaders of the world's major nations also met in London, to address that era's Great Depression. That meeting broke up in disarray.
The Depression lingered for another seven years and was finally ended only by a world war -- caused in large part by dictators brought to power by mass economic frustrations. We had better find another way to reverse this global collapse.
But judging by the preliminary sessions of the G-20 finance ministers and central-bank governors meeting in southern England late last week, this London financial summit could also be a train wreck.
President Obama has called on European leaders to do their part and spend increased public funds to stimulate demand. But the budget-conscious Europeans, led in this case by Germany, are having none of it.
Germany has increased its spending by a meager $104 billion, far less than the U.S. has done relative to the size of its economy. The French are standing with the Germans.
Rather, say European leaders, the fundamental need is to get the banking system working again. The crisis, they contend, originated with a banking collapse. More stimulus spending, in their view, will be wasted until the banking system is repaired. They also point out that this crisis was made in America, by lax financial regulation and export of toxic securities.
Specifically, they want much tougher regulation of the system's most abuse-prone players, hedge funds and private-equity companies. However, Treasury Secretary Timothy Geithner's latest scheme to rescue the banks relies heavily on government loans to hedge funds and private-equity companies to buy bonds from banks. And these private firms are resisting tighter regulation.
Last Friday, at a press conference midway through the ministers' meetings, German Chancellor Angela Merkel pointedly declared, "The issue is not spending even more but to put in place a regulatory system to prevent the economic catastrophe that the world is experiencing from being repeated," directly challenging President Obama's calls for more European spending.
The communique of the finance ministers and central bankers released Saturday sought to paper over these differences. But read against the public and private comments of key European and American officials, it suggests how much progress is still to be made.
The tragedy is that the critics on both sides of the Atlantic are right. President Obama is correct to demand that the Europeans do their share to stimulate the global economy. Otherwise, the burden falls too heavily on the U.S. The crisis indeed originated in a banking collapse, but it has now spread to the rest of the economy in a self-deepening recession. Fixing the banks is surely necessary, but not sufficient. A lot of public outlay is required, too.
By the same token, the Europeans are right when they demand of the Americans much tougher regulation as part of the efforts to get the banking system functioning again. Otherwise, confidence will not return, and the world economy will be vulnerable to future rounds of speculation, bubble, and crash.
One area where some progress is likely to be made is in the overdue regulation of offshore tax and regulatory havens. The most unsavory and deceptive financial players incorporate in havens like the Cayman Islands, where they are largely exempt from regulatory scrutiny and can hide income from tax collectors -- even though virtually all their customers and corresponding banks are based in the U.S. and Europe.
The $8 billion collapse of the fraudulent financial empire of Allen Stanford, based in the Caribbean Island of Antigua, is only the most recent example. After decades of stonewalling, the European tax havens, including Switzerland, have finally indicated that they will begin cooperating with other national banking and tax authorities.
If the major nations get serious, the smaller offshore havens will collapse. Progress on this front could help the U.S. and other leading nations realize hundreds of billions of dollars in concealed tax revenues that we need to pay for public investments.
This is a start, but it is no substitute for serious cooperation in better regulating financial institutions within the advanced countries and devising a global stimulus strategy.
Markets are looking for real progress and collaboration from this G-20 meeting. But judging from the run-up to the sessions, this could well be one of those global meetings that issues general platitudes and little more. Given the gravity of the situation, that won't be sufficient.
