1.4.09

BAILOUT DIVIDES US AND EUROPE, BUDGETARY FAILURE UNITES THEM

Political leaders from the Group of 20 leading industrial countries meeting in London in April 2009 will push for a burst of regulation.

Western European politicians in particular seem convinced that stronger international rules could have averted the financial crisis.

This search for a God-like regulator with the power to intervene in any country’s financial system looks na├»ve. It’s unlikely to be the IMF or the World Bank so no doubt they’ll dream up yet another expensive international financial institution.

Would the same politicians who are now proposing this super regulator willingly stand aside and let it interfere in their national financial markets?

In a mood of somber reflection (no repentance is evident yet) politicians may appreciate the virtues of wearing a financial straightjacket. But would they just take it off again in the madness of the next boom?


RESPONSIBILITY FOR CRISIS


Governments enjoyed all the benefits of the boom. The bubble hugely boosted their revenues.

US and UK administrations fiddled the inflation numbers, ensuring lower interest rates. That allowed governments to borrow more cheaply and spend beyond their income.

It doesn’t take a genius to spot there’s something suspicious about politicians from so many countries determined to talk about getting regulation right in the future – instead of talking about the economies crumbling under their feet.

Dreaming of a super regulator saves politicians from confronting their responsibility for the roots of the global financial crisis.

Western governments run misanthropic tax policies with one rule for the rich and another for the rest of us. In the past they justified this by saying wealth would trickle down from the lightly-taxed corporations.


GOVERNMENTS LOST CONTROL


Now politicians say rules were too soft. They blame light-touch regulation for the banking and insurance crisis.

Talk to small business people, small investors and those trying to save for pensions – there’s no light touch. Bureaucrats and tax inspectors follow their every step, from Florida to London to Liechtenstein.

That’s unproductive and unfair but it didn’t cause the financial crisis.

“Ultimately, it was central banks and governments that created an environment where private financial institutions were "encouraged" to take excessive risks. After all, the roots of the crisis can be traced to the government's negative real interest rates and growing budget deficits that create the illusion of an abundance of money,” says Evgeny Gavrilenkov, chief economist of Russian broker Troika Dialog, writing in The Moscow Times.

Gavrilenkov backs the view that governments and central banks “lost control over growth in the money supply,” allowing banks to create a parallel currency out of mortgage backed securities and collateralized debt obligations.


CURRENCY CLASH


The worst nightmare of any US administration is explaining to Americans that they no longer deserve the world’s highest living standards; that the dollar no longer buys more goods than other currencies.

So the G20 is set for a clash between the US administration which wants a global effort to stimulate the economy by borrowing even more money and western Europe which wants to talk about preventing the next crisis.

Where do emerging economies stand in all this? The emerging markets did not cause the crisis but they are sharing the pain. In return, they want a voice in finding a solution.

Russia is calling for the G20 to draw up rules to ensure macroeconomic and budgetary discipline.

That’s like asking a smoker to quit.