Tuesday, November 4, 2008

Major Countries Consider New Global Financial Order

By Andrzej Zwaniecki - Washington

A reform of the global financial order will strengthen and harmonize financial regulation across borders as countries seek to prevent a repeat of the excesses that led to the current financial crisis, according to experts.

In an October 15 statement, the Group of Seven (G7) industrialized countries plus the European Union (EU) and Russia urge "changes to the regulatory and institutional regimes for the world's financial sectors." The countries are considering a leaders' summit, which would include some emerging market nations, "in the near future to adopt an agenda for reforms." The idea was furthered at President Bush's Camp David retreat, where he met October 18 with President Nicolas Sarkozy of France and President José Manuel Barroso of the European Commission.

The modern international financial architecture was established in 1944 in Bretton Woods, New Hampshire, where leaders of 44 Western countries created the International Monetary Fund (IMF) and laid down the foundation for reducing trade barriers and facilitating the movement of capital across borders.

British Prime Minister Gordon Brown and other international leaders said that the current financial crisis has created political momentum for radical changes in this system.

Sarkozy, of France, which holds a rotating presidency of the EU, has called for globally coordinated regulation and supervision of international banking and financial transactions. He and other European leaders have floated a number of specific ideas, including creation of an international supervisory body, stricter regulation of highly speculative hedge funds and reform of credit-rating agencies.

After Bush met October 18 with Sarkozy and Barroso to discuss an international response to the financial crisis, the three men called the meeting a "positive discussion." In a statement they say they will "reach out to other world leaders next week" to propose a series of summits among countries to solve the crisis. They propose that the first such summit be held in the United States soon after the presidential election.

White House deputy spokesman Tony Fratto said October 16 that "every good idea" would be considered at the yet-unscheduled leaders' summit. But he and other U.S. officials said the overhaul of the world's financial framework must not restrict the flow of trade and investment.

Barry Eichengreen, an economics professor at University of California at Berkeley, said world leaders likely will reform the global financial framework during a series of meetings and discussions rather than at one make-or-break summit. They will need time to take into account different interests of different countries, he told America.gov. They also will push for new powers for the existing institutions - such as the IMF or the Financial Stability Forum - rather than for the creation of new bodies, he said.

Countries must strengthen financial regulation and better harmonize it across borders but not necessarily make it uniform, Eichengreen said.

Steven Schwarcz, the director of the Global Capital Markets Center at Duke University, said the current turmoil shows the need for "an international liquidity provider of last resort." Such a facility would have authority not only to lend to institutions, but also to buy bad securities in panicked markets, he told America.gov.

Schwarcz foresaw the financial crisis in papers he published in 2007 and proposed a solution similar to the Treasury Department's original September rescue plan. He calls for better transparency of complex financial transactions so that market participants can "value assets in a panicked market."

The credit freeze has occurred because uncertainty about how much bad debt banks and other financial institutions hold has made them reluctant to lend to each other and other market entities, experts say.

The crisis has already prompted some international convergence and coordination of monetary and financial policies. But as countries push for stricter regulation and supervision of financial markets, Eichengreen said, they are likely to move away from the U.S. model of market self-regulation and toward greater reliance on government regulation.

This movement, combined with a major government intervention in private markets, will mark the end of the American-style capitalism as we know it, the media and some market observers declared.

Most private-sector experts and U.S. officials disagree.


President Bush said government involvement in private markets is limited in size, scope and duration.

Schwarcz said the U.S. government has intervened in private business in the past, for example, taking equity stakes in the Chrysler Corporation to save it from bankruptcy. But in that and other cases, it relinquished its ownership stakes after the crisis ended.

What makes this intervention different is the scope of measures used by the central bank and the Treasury Department and the amount of money involved. That is why Eichengreen believes it will take years for the government to back out from markets.

He said that, although this is not the end of American capitalism, it is the end of the American approach to financial regulation, which has produced greatly liberalized markets.

More heavy-handed financial regulatory reform is likely to emerge from the new U.S. Congress in 2009, Eichengreen said.

He said that Americans will rediscover the fundamental objectives of regulation - ensuring systemic stability, preserving market integrity and protecting consumers - and will pursue them vigorously.

"We have moved too far in the direction of 'the market can take care of itself, the consumer can take care of himself,'" he said. "We are going to swing back now."

The text of statements October 18 by Bush, Sarkozy and Barroso is available on America.gov.

The texts of Bush's October 17 remarks and the Group of Eight statement are available on the White House Web site.