At $10 trillion and mounting, US effort to detoxify its economy is the costliest clean-up in history. By now the world has committed a fifth of its yearly income to bringing its financial market back to health. But, as an International Monetary Fund paper presented at a meeting of finance ministers and central bank governors from the Group of 20 (G-20) largest economies last week points out, the attempt to restructure afflicted banks has been ad hoc, responding to “market pressure rather than being based on a full diagnosis of the underlying soundness of institutions”. Targeted protection for creditors yields bizarre side-effects. Case in point: The popular outrage US President Barack Obama is facing over the million-dollar bonuses that the bosses of the seriously ailing American International Group are paying themselves out of taxpayers' money.
The heads of G-20 states meeting in April will now have to turn from the immediacy of liquidity injection to a coordinated response on recapitalising their financial systems and disposing all unearthed toxic assets. The rot is still not completely exposed. The IMF warns that in “countries where banking sectors still appear resilient, the deepening global financial crisis is likely to imply greater stresses”. Going into the G-20 summit in London, most countries will have already abandoned the Greenspan formula that markets police themselves. The meeting will make noises about setting up a new financial constabulary. Fortunately, because of sovereignty concerns, these noises will remain noises. What is needed, and what is happening, are coordinated national efforts at financial re-regulation.
At its meeting in November, the G-20 announced that it would not put up protective barriers for at least a year. Since then unsettling voices are being heard on keeping jobs and money at home. India intends to take up the issue of protectionism, but its voice does not carry at the high altar — in part because it has been as guilty of raising trade barriers as anyone else. Over-regulation and protection are two clear and present dangers the world is confronting. Countries like India, that have resisted the excesses of capitalism deserve to be heard. Capital seeks out arbitrage opportunities and any new financial order should attempt to close those arising from regulatory and tariff differentials. As an education, $10 trillion is on the steep side. Let’s make some use of it.