naked capitalism

The latest back-handed insult may be yet another variant of the Bush “we don’t do multilateralism” syndrome. Unfortunately, as various pundits writing at the Financial Times have pointed out, the US’s stranglehold on power is slipping. Even Obama in the campaign repeatedly said that a country cannot maintain military dominance if it is not a dominant economic player (the implication being the days of US as sole superpower are waning).

So to recap: Bush almost offhandedly agreed volunteered to host a summit to discuss the state of the financial world, a very out-of-character gesture. The most convincing explanation was that it was in response to a request by Nicolas Sarkozy, who has been very keen to strengthen international regulation, and has also been particularly helpful to the US president.

Since the time Bush picked (November 15) was after the elections, it was a bizarre gesture. Was this to pressure a new Administration into formulating views before they were ready (Bush had made it clear that the President elect would participate). China, separately, started saber-rattling to include the currency regime in the discussions, which was not part of the original game plan (and note further that the noises out of China on the dollar have been schizophrenic, which suggests, at best, that opposed camps are in a major power struggle, or at worst, China has badly conflicted objectives, as in they want to keep the yuan weak but are uncomfortable with buying more dollar assets, which is precisely what they have to do to pursue that strategy).

So the US’s face saving expedient is to downgrade the summit. Obama is sending representatives who are clearly peripheral players; Paulson is now effectively saying that this session will not accomplish much:

This weekend provides an opportunity for nations to take an important step, but only one step, on the necessary path to reform.

That sounds like the MOST they get to do is agree on the agenda for future meetings. Only one step, children!

This verges on an insult to the other participants, and were it not for the fact that Bush called the meeting and Paulson will be in attendance, if I were in their shoes, I’d lower the seniority of my delegate pronto.

The US is also seeking to externalize responsibility for the financial mess: the problem. of course, is those Chinese, keeping their currency too cheap and running those huge trade surpluses.

Ahem, it takes two to tango. Those massive surpluses have been a feature of the landscape for quite some time. They were convenient. They kept inflation down and cheap imports and cheap finance allowed the US consumer to live above his means, masking the impact of stagnant worker wages.

We could easily have threatened protectionist measures (once China had built up some FX reserves so as to feel less at risk of a re-run of the Asian crisis). But no, the religion of free trade was not to be questioned, even if everyone was smarter about gaming the system than we were.

Mind you, global imbalances, aka, China (and Japan and Taiwan and the Gulf States) buy US assets (mainly Treasuries) to fund our chronic overconsumption IS a huge problem, and it would be vastly better if we try to find an orderly way out. But how can Paulson say with a straight face that the summit needs to address global imbalances when he just went to Congress the very same day to ask to get his hands on the rest of the TARP money ($350 billion remains) precisely to keep US citizens overspending? Yes, I know the man is a chronic liar, it is one of our favorite themes here. But the Chinese, unlike the US media, are quite willing to point out the, um, inconsistencies in our policies.

This now looks deeply cynical. Were the Bushies trying to undermine multilateralism on the way out by neutering a potentially useful group? Given the funk the markets are now in, this could have been a good forum for crafting an emergency market-reassuring response. International coordinated moves did buoy the markets for a couple of weeks last month.

From the Financial Times:

The outgoing US administration of George W. Bush and the incoming administration of Barack Obama both signalled in different ways on Wednesday that they did not intend to be bounced into firm commitments on sweeping reform of the international financial system at this weekend’s G20 summit.

Hank Paulson, Treasury secretary, said: “This weekend provides an opportunity for nations to take an important step, but only one step, on the necessary path to reform.”

He made it clear that the US wants the agenda to deal not just with regulation, but also with the global economic imbalances that he said were “at the heart of our problems”.

Meanwhile, the Obama transition team said the president-elect would send Madeleine Albright, a former Democratic secretary of state, and Jim Leach, a former Republican congressman, to represent him in discussions with world leaders attending the summit.

The two figures chosen are senior dignitaries, but neither is part of the Obama economic team, or likely to take a leadership role on economic issues in the future…..

Washington-based analysts say the outgoing and incoming administrations appear to share a cautious view of the summit, wary of the grand ambition and reform timetables proposed by some European leaders.

Mr Paulson said it was too early to focus on the future regulatory structure. “Our first priority must be recovery and repair,” he said.

He added: “To adequately reform our system we must make sure we fully understand the nature of the problem which will not be possible until we are confident it is behind us.”

At the same time, Mr Paulson indicated that the US was willing to establish working groups to look at some issues, including risk management practices, compensation structures, oversight of securitised mortgage markets, credit rating agencies, and the infrastructure of the derivatives market.

He also signalled a willingness to consider proposals to “improve co-operation and information-sharing” among national regulators.

Mr Paulson said the US was “well aware and humbled by our own failings and recognise our special responsibility to the global economy”.

But the Treasury secretary made it clear there were failings in Europe as well – with banks taking on too much leverage, too much exposure to their own housing markets and too much exposure to emerging economies in central Europe.

He said the agenda needed to include the global imbalances that fuelled low global interest rates and excess risk-taking in the pre-crisis period including the “lack of consumption and accumulation of reserves in Asia and oil-exporting countries and structural issues in Europe”.