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In the great divide between Europe and the U.S. over regulation, the American way won out at the G20 talks.
Barack Obama is back from his first overseas trip as president, including his first summit as leader of the West and his first visit to Iraq as commander-in-chief. He won plaudits for his negotiating skills at the G20 summit in London and for his speech in Turkey defending the American way of life.
What won less attention, but might be equally important, was how the American way of regulating the financial world prevailed at the G20 talks.
Though press reports suggested that world leaders were on board with clamping down on hedge funds, tax havens, and credit-rating agencies, a global financial regulator will not be created any time soon.
The reason: There are vastly different philosophies on both sides of the Atlantic on the role of government regulation. It’s the difference between preventing cancer and treating cancer. Europeans are inclined to use regulation to prevent crises whereas Americans are inclined to use it to treat crises.
Germany and France went into the summit demanding a global regulatory system that could reach across borders. They came away, instead, with an approach where regulatory goals and objectives could be pursued by nations on their own with involvement of international bodies keeping track of their progress.
"At the end of the day, their red-line demands were reduced to regulating hedge funds and addressing tax havens,” said John Kirton, director of the G20 Research Group at the University of Toronto Munk Centre for International Studies, suggesting most countries view a global regulator as a loss of sovereignty.
Since the U.S. was more interested in getting other countries to join the stimulus bandwagon than in creating a global regulator, the outcome was more in line with how regulation works on this side of the Atlantic.
The predisposition of federal regulators in Washington usually is to react to the problems at hand. Often, especially in banking, there are multiple regulators to consider. Regulators also are subject to political pressure, funding constraints, intense lobbying from Wall Street, and, often, Republican resistance to new regulation.
Consider that while the G20 was trying to hammer out a sweeping regulatory response to the world financial crisis, a single move in the U.S. by the organization that sets accounting standards for banks caused a rally of financial stocks on Wall Street. It allowed banks to have more flexibility in how they value toxic assets and report losses — thus boosting their balance sheets.
This exemplifies how U.S. regulators tend to be reactive to lobbying and the situation at hand. A disaster in this country, whether it be tainted food, unsafe automobiles, or protecting workers, usually results in new rules that come at a measured pace, if at all, depending on the political party in power.