What can we expect from the G20?

What Governments do and say can affect the course of an economic crisis.  Their actions and statements can affect the all-important expectations of the rest of us.  But once a crisis is underway Governments are powerless to rewind the film. 

On this score the Government has proved clumsy.  The delay, allowing the Northern Rock crisis to fester over that long weekend where depositors queued to take their savings, left the Government well behind the curve.

Likewise with its so-called stimulus package.  Why so much of our limited room to manoeuvre was wasted on a VAT cut still awaits a sensible explanation.  I thought the move ill-judged and I was the only MP on the Government side to vote against it.

Similarly with the G20 summit.  For over a month the event has been talked up way beyond what could reasonably be expected from a short day meeting, even if that meeting has been backed up with some careful work beforehand, as it obviously has been.

The danger here is that the all important financial markets will take away a message of division and lost opportunity, and act accordingly in becoming even more cautious about the world economy.

Victory can still be snatched from the jaws of defeat.  For this to happen four key moves need to be made.

First, the G20 would be well-advised to drop all talk about further reflationary measures.  Britain certainly has no room in its collapsing national budget to find such money anyway.

But the reflationary sums being spoken of are puny compared with the deficits Governments are already running up. 

Over the next two years the British Government will be borrowing probably in excess of £380 billion.  Imagine the impact on demand if these sums were not forthcoming.  Now put that sum against the Government’s £20 billion reflationary package.

All the G20 Governments are into big borrowing.  This, surely, is the mega fiscal stimulus that is hopefully going to prevent major economies collapsing.  The message that should go out from the G20 meeting is to emphasise on the size the reflationary borrowing to which all Governments are committed.  

This leads to the second important announcement.  Let’s remain cheerful and assume that these record sums are out there somewhere to be borrowed.  A key task of Governments is to coordinate their issuing of debt and to do so in an ordered and staged manner. 

Such an approach will lessen any turbulence that might be felt if the debt demands are not spread out evenly throughout the next few years. 

Third, while it sounds good to pontificate on the need for new worldwide financial controls, such a distant goal is of less importance now than bringing to book some of those whose actions have brought us to this sorry pass.  When will we take action, for example, against the main players who have brought near financial ruin to all of us? 

We do not need to wait for any new regulation.  What is most urgently required is to throw the existing regulatory rule book at offenders. 

The FSA’s rulebook lays down eleven principles rather like the ten commandments which must guide the actions of our country’s main financial players.  These are:

  1. A firm must conduct its business with integrity.
  2. A first must conduct its business with due skill, care and diligence.
  3. A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk-managements systems. 
  4. A firm must maintain adequate financial resources.
  5. A firm must observe proper standards of market conduct.
  6. A firm must pay due regard to the interests of its customers and treat them fairly.
  7. A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.   
  8. A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.     
  9. A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.      
  10. A firm must arrange adequate protection for clients’ assets when it is responsible for them.    
  11. A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.

It would not be that difficult to start handing out sentences for the breech of any one, let alone all these principles.

When is the FSA going to give up its absurd quest to create the most complicated and rigourous form of new regulation and start, instead, implementing the existing measures?  The G20 countries should agree to instruct their regulatory authorities to begin legal action now against the main culprits.

Fourthly, a beguilingly simple, but important reform could be agreed that leads to re-establishing the split between retail and merchant banking.  There clearly will be pressure against such a change.  President Obama’s chief economic advisor, Larry Summers, was largely responsible for its destruction in America.  And I do not need to mention who was responsible for an equally dangerous move here.

This reform will begin to build and effective firewall between the deposits we as ordinary members of the public make into our banking system, and with it the expectation conservative banking policy, and those of us who want to invest their savings in more risky ventures in what was once known as the merchant banking system. 

Such a reform would be an important insurance against a return of the economic devastation that we are beginning to experience as a result of the whole of our banking system believing it could make big bucks on the cheap.  It would also restore individual confidence in at least one part of our financial institutions. 

And nobody could talk down a summit which agreed these four proposals as being anything but a success. 

 

 

 

 

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