Entangled Alliances

photo credit: thefost

It’s now been a whole week since the G20 met (an event which, if it was a Friends episode, would surely be called The One Where The Canadian Prime Minister Missed The Group Photo Because He Was In the Toilet) and yet commentators are still very much divided on the deceptively simple question: Was the summit a success? This isn’t really surprising, since the answer depends on how you define success. For example, if you were looking for a demonstration that in the midst of global recession the world’s leaders are able to get together, put aside their differences and promise to sort stuff out then the summit was very successful indeed. Alternatively, if you were looking for a solid commitment to prevent a global crisis like this from ever happening again, then you must have come away very happy with the result. And if what you were after was a bunch of vague commitments that will probably/maybe be ratified in the future but more importantly look very good in the present, then you’re probably still doing triple backflips of joy.

But if you were hoping for a substantive commitment to lifting the global economy out of recession – and doing it now, rather than later – then it’s hard not to see the G20 summit as a bit of a let-down, albeit a very glamorous and show-stopping one. It’s true that restoring growth and getting people back to work was never the sole aim of the summit- in the final communique it’s merely listed as an equal pledge amongst eight others -  but lifting the world out of recession is nevertheless the first thing you’d expect someone to say if you asked them what the summit’s main goal was. And with good reason – the current numbers coming out of America alone suggest that we might have to soon start switching out terminology from talk of global recession to the use of the dreaded “d” word (”depression” that is, though doom and devastation work quite well too).

To prove my point, let’s examine what have been touted as the main substantive achievements of the summit – the clampdown on tax havens, the new regulatory framework and the headline-grabbing sum of $1.1 trillion.

The publishing of a blacklist for tax havens is obviously a really welcome development, but tax havens had little to nothing to do with the current crisis. Tackling them was very much an example of “we’re never going to have so much capital to get stuff done, so let’s sort out the havens while we’re here”. Moving on to the ambitious new international regulatory framework, this is – assuming it’s actually followed through and enforced effectively – a spectacularly impressive achievement.  Indeed, the proposed reforms that will be the responsibility of the new, international “Financial Stability Board” read like a checklist of what should have been done to prevent the current recession: controls on leveraging,  stricter capital reserve requirements, regulation of derivatives like credit default swaps, better analysis of systemic risk, etc. But let’s be clear: the progress on regulation is all about preventing another global recession. Welcome as these reforms are, they’re of no use for the one we’re in now.

Which brings us to that eye-catching $1.1. trillion pledge. If you break it down, it comes to an extra $500 billion in funding for the International Monetary fund, a $250 billion increase in the IMF’s “special drawing rights” (sort of like a cheap overdraft facility for IMF members), $250 billion in trade finance and $100 for multi-lateral development banks like the World Bank. At first glance, this is an impressive haul. But, just like Bernie Madoff’s company accounts, the more you scrutinise the numbers the more they fall apart.  Mark Lander in the New York Times has undertaken a rather damning analysis of the figures; suffice to say it turns out that much of the $1.1 trillion is a mixture of money that’s already been pledged, hasn’t yet been pledged, isn’t really money or has been pledged but needs to face an unlikely approval by a country’s legislature (hello, American Congress!). As Felix Salmon has pointed out, at best you can say that there is around $400 billion of new money.  Others have been more brutal and pegged it at $100 billion. But even putting aside questions about the exact amount of new money pledged, there still remains the fact that the majority of it is aimed at preventing the poorest countries from financial collapse. A crucial concern, no doubt, but it doesn’t really help us with the recession we’re already in – it’s merely preventing it from deteriorating too badly. In other words it’s staunching the wound but it’s hardly sowing our fingers back on…

So, as the steak-lover said to the vegetarian chef, where is the beef? Leading economists have warned that we need more Keynesian, deficit-spending, stimulus packages in order to reduce the growing output gap between what the world should be producing and what it is producing. But there were no commitments to increase the size of international stimulus packages to be found in the final communique, merely vague promises and disingenuously boastful references to the inadequate stimulus packages that have already been passed. This was not at all surprising given that the Franco-German anti-stimulus crowd had won the argument against the Anglo-Americans weeks before, but it was nevertheless very dispiriting to see the advice of most leading economists trumped by misguided European concerns over the demerits of more stimulus.  Of equal concern is the fact that another piece in the recovery puzzle – dealing with the toxic assets of banks and confronting the current insolvency of many leading financial institutions – was also shied away from; more vague language was all we got on that front.

This leaves us with the alarming realisation that a summit convened in response to a global recession has failed to come up with any substantive responses to it. It’s true that the leaders of the free world put on the convincing show that everyone needed to see. And it’s also true that a lot was achieved to prevent another recession like this one. In that sense, good work was done. But when it came to fixing the economy in the here and now, the G20 members put on their magician’s hats, bestrode the stage and gave us nothing but grandiose statements and awe-inspiring illusions; except unlike most good conjurers we can now see how their tricks were done. And, frankly, I want my money back.