The Financial Tsunami ( FT ) - The Way Forward ( 18 ) - One Giant Leap for Mankind

http://news.bbc.co.uk/2/hi/business/7979606.stm

Amid all the unfavourable talks of unbridgeable differences and threatened walkouts by France and strong opposition in further fiscal spending by Germany the G20 summit in London ended happily as ONE GIANT LEAP FOR MANKIND ! A big sigh of relief from every global citizen is now on the cards. Nor is this relief just a psychological one. Like a sweetener to any national budget this global budget for our future presented something positive for each one of us. I seldom praise the politicians but I have to say for once that G20 leaders did not let us down at the extremely critical moment which could mean make or break to our world economy. Luckily, thanks to the prevailing of common sense among all participating countries representing two-thirds of the total global population, 90% of world productive power and 80% 0f total world trade WE HAVE MADE It at least for the time being. I can comfortably say as I so boldly predicted in my article - " 2008 Economic & Financial Tsunami - An Overview for the Lay Person " ( accessible on my website by clicking on the title of this blog or any other blog on this FORUM ) that a stablization of the global economic tailspin within 3 months of the inauguration of the Obama administration should lead to a relatively bearable recession of possibly 3 years. I am really optimistic that my prediction will more or less hold true.

The implications of the measures declared in the G20 joint communique ( as per link above ) will certainly be far reaching. It is not an overstatement in any sense to say that it is ONE GIANT LEAP FOR MANKIND. Never before have the world leaders shown such common sense and wisdom coupled with foresight and great humanity. There is, indeed, a unity of purpose and forsaking of narrow national interest and pride. It is also pragmatic and far reaching and thus should form a solid foundation for the strengthening of global co-operation in future that will hopefully give rise to some form of proto global utopia operating on an enlightened form of capitaliism ( not just laissez faire devoid of human feelings and consisting of raw materialism motivated by greed and a blind search for efficiency ).

Having sung praises for the positive and encouraging measures outlined in the G20 statement I must raise some, shall we say, comments on the less than perfect aspects of the G20 proposals. For one thing, there is not yet a formal admission ( in the statement at least ) that the present dysfunctional mechanism of the international financial institutions like IMF, World Bank and other Multilateral Development Banks ( Asia Development Bank, etc. ) is the result of unfair representation of the majority of countries affected by the policies of such organizations. They are mainly private vehicles for the rich countries which have all the say. The only reference to this sensitive subject is in clause ( 20 ) : - " We agree that the heads and senior leadership of the international financial institutions should be appointed through an open, transparent, and merit-based process ". This is definitely an improvement but does not correct the " rich boys club " syndrome in a fundamental way. Perhaps, the abolition of veto rights of the rich nations ( as I humbly suggested ) will enable these international financial institutions to function properly for the greater good than simply serving narrow national interest of the rich countries.

The second of my comments or reservations on the G20 statement is their rather empty " to do whatever is necessary " stance in fiscal spending to revive the global economic growth. In clause ( 6 ) of the statement G20 declared that : - " We are committed ( did not say how ? ) to deliver the scale of sustained fiscal effort to restore growth." Nor was there any definite promise to co-ordinate those efforts. Without overall planning and each country setting her own priority I am afraid there is an unacceptable risk of overall failure in stimulating growth based on scattered and isolated fiscal spending plans left to the fancy of individual nations. Although it would be too much to ask of every nation to give up their own budgetary policies I would expect at least some small % such as 10% to 15 % of each country's budget for the next 3 years be planned on a joint internationally coordinated efforts. When the global economy has recovered to her old healthy self such strict international budgetary co-ordination could then be relaxed.

All in all, the G20 summit has done exceedingly well and its achievement is beyond our most optimistic expectations. If all the measures are successfully implemented there will be a really bright future for the global economy and a completely new page for international co-operation. The world will undoubtedly be a better place operating on an enlightened market mechanism with a human heart and a higher level of moral code. My sincere congratulations to all world leaders for exercising their wisdom and common sense. I will be writing a more detailed analysis and implications of the G2o communique but before finishing today's blog I must compare my own proposals to those in the communique to hopefully improve my understanding of the rationale behind the declared G20 measures. So, here it is : -

The paramount goals of the G20 summit are clearly set out in clause (4 ) : - They are as follows

( a ) Restore confidence - ( my ( A ) ( 1 ) )

( b ) Repair financial system - ( my ( A ) ( 2 ) )

( c ) Reform financial regulatory system - ( my ( A ) ( 3 ) )

( d ) Reject protectionism - ( my ( B ) ( 1 ) )

( e ) Build a green and sustainable recovery - ( my ( B ) ( 6 ) )

I am so glad to say that I have not missed any of these paramount goals. These are so basic in economics that I should have my degree in economics stripped off had I missed anyone of the above. My related proposals ( reference number in my yesterday's blog are given in parenthesis after each of the above goals ).

My proposals that are " accepted " or appearing in the relevant clause of the G20 communique : -

( 1 ) Keep the credit flowing - ( A ) ( 2 ) - Clause ( 8 ) : - " Our actions to restore growth cannot be effective until we restore domestic lending and international capital flow."

( 2 ) Overhaul the financial regulatory system - ( A ) ( 4 ) : -

I proposed the setting up of international financial regulatory and monitoring body. Clause ( 15 ) : - " - to establish a new Financial Stability Board ( FSB ) with a strengthened mandate .....that FSB should collaborate with IMF to provide early warning of marcroeconomic and financial risks and actions needed to address them ".

( 3 ) Under my ( A ) ( 4 ) I also moved to regulate hedge funds and crack down on tax havens. Clause ( 15 ) also proposed : - " to extend our regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds ."

( 4 ) Under my ( A ) ( 4 ) I proposed crackdown on tax haven operations. Clause ( 15 ) likewise proposed this : - " to take actions against non-cooperative jurisdictions including tax havens ."

( 5 ) Again, under my ( A ) ( 4 ) I proposed banning of conflict of interests in respect of multiple financial roles. Clause ( 15 ) said this : - " to extend regulatory oversight and registration of Credit Rating Agencies to ensure they meet the international code of practice, in particular to prevent unacceptable conflicts of interest ."

( 6 ) Refrain from accusations and counter accusations - my proposal in ( B ) ( 3 )

No finger pointing or even implications of fault finding can be found in the communique to create a total sense of unity and pragmatism.

( 7 ) Promote an enlightened form of capitalism - one of my long-term proposals in ( B ) ( 5 )

By helping the poor nations for whom 100 billion have been set aside mainly through sale of IMF gold and international contribution to 500 billion extra SDR to IMF to boost total available emergency funding for countries in trouble through IMF rescue efforts the foundation of an enlightened form of capitalism has been solidly laid. There were many repeated mention of taking the interests of poor nations and the underprivileged sectors of the global population as well into consideration. This is truly a new era for raising the standard of international morality and social responsibility.

( 8 ) Don't delay the environmental measures in the name of expedience - another one of my long-term proposals in ( B ) ( 6 ).

Clause ( 4 ) clearly stated in paramount goal ( e ) of G20 that " build a green and sustainable recovery. "

My proposals not appearing in G20 communique are as follows :-

( i ) The issue of FT rescue bonds to raise rescue fund in a wise manner. My proposal in ( A ) ( 6 ).

( ii ) The capping and investigation of CEO remuneration. My proposal in ( A ) ( 4 ).

( iii ) Boost public spending on the rescue package wisely - my proposal in ( A ) ( 5 ). There was, in fact, disappointingly little on this important aspect of the rescue efforts probably because of French & German opposition to further fiscal spending before the reformed financial regulatory system is put in place. Hopefully, the important topic will feature prominently in the Fall 2009 follow-up summit and the G20 financial ministers meeting in early 2010.

Perhaps, the most encouraging consensus was the setting of a 2 % global economic growth rate by the end of 2010 as declared in clause ( 10 ). All in all the G20 summit in London is successful beyond preliminary expectations. I would not hesitate to award a 70 % grading for the G20 efforts. As for my own proposals and predictions, it is for the readers to decide. See you all soon at my next blog !

JKHC.