To make the Toronto Summit effective, attack the incentive system
The old system that asphyxiated consumer credit and asset lines to destroy homes and dreams of the many while allowing the moneyed to buy yachts and villas at Monte Negro is gone. Let’s hope G20 realises this at Toronto and fixes this unexplored epicentre of the ongoing financial crisis, writes Gautam Chikermane.columns Updated: Jun 06, 2010 22:01 IST
In 20 days, Prime Minister Manmohan Singh will be one among 20 leaders of the world’s 20 largest economies who will sign a declaration — the fourth in a series, after Washington in November 2008, London in April 2009 and Pittsburgh in September 2009 — that should help catalyse global economic growth. Question: will the Toronto Summit that will conclude on June 27 be able to attack and change the epicentre of the ongoing financial crisis — the incentive system of executives who run the financial system?
I think not.
Even as ripples of optimism around fixing the financial sector flow from the recently-concluded meeting of G20 ministers and central bank governors at Busan in South Korea, the fact is that the 1,543-word June 5 communique gives little confidence about the fixing what I believe is the major problem in global finance — the incentive structure.
So, even as the communique waxes eloquent about important ingredients for making a new financial soup — greater transparency, improved quality and quantity of bank capital, reduced moral hazard, making the financial sector responsible to pay for government intervention, setting up of a single high-quality global accounting standards and so on — it is simply handing a new recipe to the same cooks (or shall we call them crooks?) who are now better known for turning the previous soup toxic.
Manmohan Singh represents the world’s second-fastest growing significant economy in this summit but clearly the financial masonry for global economic growth is in the hands of those who created the crisis in the first place — Wall Street. So, outside G20, even as US President Barack Obama attempts to bring in a bill to protect consumers and end “those ridiculous contracts with pages of fine print that no one can figure out”, Wall Street banks and consumer finance companies have put their millions behind lobbying against the bill.
Unless this lobby and the men behind this unabashed, shameless and barbaric power are tamed, no amount of clubbing at G20 is going to help. What G20 has done so far is to have got governments to fund the excesses of executives set on running up their bonuses by putting the entire financial system at risk. That means, billions of taxpayer-consumers have funded their penthouses and lost their homes in the West (India, thankfully, has been spared the agony, so far, but the country has felt the tremors in the form of a slowdown and export hit).
It is time this vicious cycle of using consumers’ money to smother consumer interest ended. So, while the Toronto Summit will take further the macroeconomic issues of global financial stability, changed stakes in multilateral financial institutions and regulation of hedge funds and probably give some lip service about tightening them, I see little hope for the consumer if the incentive structure — the way the world’s best minds, now in finance, are compensated — remains unchanged.
This, please remember, is not the 1980s, when led by a blind faith in free markets, the financial sector in the West was deregulated to create wealth-destroying monsters such as Lehman Brothers. This is 2010, a time when most of the world is just about stepping out of the worst recession since the Great Depression, global economic growth has moved to the East (notably, China and India) with stagnancies in Europe, and the internet has made the average consumer better informed than she ever was.
In this world, I don’t think global politics in any democracy will allow for excesses of the past. The old system that asphyxiated consumer credit and asset lines to destroy homes and dreams of the many while allowing the moneyed to buy yachts and villas at Monte Negro is gone. Let’s hope G20 realises this at Toronto and fixes this unexplored epicentre of the ongoing financial crisis.