Connect to share and comment
World leaders can agree on a new set of economic prerogatives, but they're only as strong as the rules underlying them.
Significantly, the words, sanctions or penalties were not whispered. Instead, the group called repeatedly on the Financial Stability Board, a group of regulators and central bankers who are becoming increasingly important, to stay on top of things, suggest further measures, and report on nations’ progress according to a set timetable.
If countries let their economies become “unbalanced,” the International Monetary Fund would “come in and assess how we’re doing and where you see early signs of unsustainable imbalances emerging, you want to make it compelling to act earlier … not wait,” said U.S. Treasury Secretary Geithner.
Pretty murky stuff.
World leaders, prompted by their finance experts and ministers, can agree on a new set of economic prerogatives, but they will only be as good as the rules underlying them and, even more importantly, the enforcement mechanisms that are put in place to guard against another worldwide financial blowup.
The other push, which is for requiring banks to go about their business more prudently by increasing capital requirements and limiting big payouts to bankers, brokers and traders, will also only be meaningful if the standards are spelled out clearly and then enforced. Sarkozy used language like forcing banks to increase their equity ratios, especially those engaging in high-risk activities. The G20 called on banks to have more capital on hand and restrict compensation and bonuses by tying them to performance, not risk taking. The preference also is to avoid sweetheart, multi-year bonuses, making compensation policies transparent, deferring a portion of compensation and have provisions for giving back rewards as punishment for disappointing results. It said all “major financial centers” would be on board with new internationally agreed upon rules to better quality capital requirements.
As the plan seems to indicate, countries would issue standards, put in place supervisory mechanisms and the Financial Stability Board would assess progress and suggest modifications.
Geithner, who promised agreement strengthening capital standards, reforming compensation and bringing more oversight to derivatives and hedge funds, was short on specifics. He asked for commitments on a clear set of standards “that are measureable and enforceable” with the hope that it’s in everyone’s self interest to have tough rules.
Coming from the world of Wall Street himself, the U.S. Treasury Secretary knows that words like “assess” have little meaning and the hope that a sense of common good will prevail is rhetoric best saved for summitry.
The lack of specificity seemed to irk Germany and Japan who want more attention paid to financial regulation and less to “global imbalances.”
As Yukio Hatoyama, Japan’s prime minister, said in a speech, it’s time to end the “excessive money-making games.”