Around the world, the reaction of investment markets to the Group 20 summit at London has been emphatically positive and there is optimism all around.
While the 20 leaders are professional optimists, so to speak, professional pessimists too are conceding some ground. Even the New York University economist Nouriel Roubini, who famously predicted the economic meltdown in some detail, has been reported widely as having turned an optimist recently. Actually, all Roubini has said that he now thinks that the chances of a full-fledged depression are somewhat less than that of a mere deep and long recession. Coming from Dr Doom, I guess that could pass for optimism.
The question is whether the lifting mood of gloom is rooted in reality or mirrors a public relations effect. To answer this question, one must examine whether the G-20’s received wisdom about the root cause of the crisis sounds appealing.
The group of 20 has promised to make funds available to the International Monetary Fund to avoid national bankruptcies and vowed to create a new global regime of tighter financial regulation. The aim of tighter regulation has three main components. These are greater regulation of under-unregulated activities like hedge funds and exotic instruments, tighter monitoring of credit-rating agencies and a crackdown on off-shore tax havens. This is a good start. There’s no doubt that unregulated markets and dysfunctional and possibly corrupt credit rating practices played a central role in creating the crisis, although the specific role of tax-havens in this particular crisis is probably not central. There is already much regulatory tightening globally, but I have my doubts on the ability of governments because those who need to be regulated are politically powerful.
But is this all there is to tackling the economic crisis? A trillion bucks for those teetering on the brink and tighter regulations for those who pushed them there? This implies that a lax regulatory framework is the root cause of this crisis. But perhaps there’s something more to it.
Dr Nouriel ‘Doom’ Roubini, for example, has always held the gigantic quantum of easy money that was being poured into the global economy as the root cause of the crisis. The problem was is there was all this money that had to be deployed somewhere. And that caused the sub-prime homes of America and the sands of Dubai. From this perspective, almost everything that is being done to solve the problems will eventually boil down to an attempt to reinflate the same bubble again.
Still, I guess one should be thankful that the G20 has provided some cheer. Since panic is one of the components of the current crisis, anything that raises hope should be part of the solution.
(The writer is a Managing director of Value Research)