Bush and Obama Diss the G20 Financial Summit

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”.

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19 comments

  1. Anonymous

    Its hard and fast now. Just posted earlier, G20 comment in (Paulson Now Admits Mendacity) about it being a photo opp shezz.

    In another post I stated we needed names and addresses of the bandits. Well I have to put all of this on the “Great Communicator” Reagen, when he messed with the US GAAP to kick start the economy, by allowing bad practice “Disneyland accounting”. Thank you GOP, Thank weak or bad DEMs/Indapendents Thank you all very much.

  2. cent21

    We can, at least, rejoice that the Bush administration is running out of time to screw anything else up.

    This week’s action – with today’s about face on TARP, and Bush declaring that we should not abandon capitalism – rates right up there with the President’s declaring that there was a fire in the theater a month or so ago, resulting in this week’s declarations that economic activity has “fallen off a cliff”. To save capitalism, Bush should have arranged to fall upon his own petard several weeks ago.

  3. Richard Smith

    Paulson: “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.”

    What magnificent gobbledegook.

    Does he mean that, right now, he doesn’t know what he’s doing? Or that he’s going to make sure that no-one finds out what he’s been up to, until he’s long gone?

    Thta’s a nice criterion for introduction of regulation though: just be suitably strict about what counts as full understanding, and you can postpone new regulation for ever.

  4. ndk

    When it comes to currencies, I remain absolutely fixated on the comments made by Mr. Sakakibara in support of a dramatically stronger yen. Multilateralism, excepting the efforts of Sarkozy and the small successes of late October, smells dead.

    Why do you suspect sabotage though? It doesn’t seem to fit the trade policies that the Bush administration often followed. While the feelings and lives of others were never a consideration in political matters, I think they were actually quite multilateral in trade and economic relations.

  5. Anonymous

    What if China point blank demands the dollar to be demoted to the rank of North American Peso?… hmmm… Or would that be more like a promotion?…

    What would Paulson do then?

  6. Anonymous

    Somebody somewhere is going to start a scheme to short the entire US/dollar system.

    The current structure is not sustainable.

    Anybody has a chart when all these new treasury will have to be paid? Bush has been printing a lot of short term (3-5yrs) treasuries.

    2 yrs down the road, we are going to start defaulting on treasuries if we have L shape recession.

  7. Anonymous

    Don’t look now but Bush and Paulson won’t be around anymore in a month and a half. Bernie will be though.

    If it wasn’t for the ramp job and the US$ being in the high 80s, US officials would be more open to discussions. As it is now, they can thumb their noses at Russia and Red China, at least for this weekend.

    President-elect sending underlings is better than him being there in person proposing free health benefits for the world population.

    Whatda a frick’in mess.

    Bad news, I order a big screen tv from Circuit City and DHL is the delivery service……..Jay Leno

  8. River

    Were you ever in a pick up baseball game as a kid? Did the kid that owned the bat and ball get ticked off and threaten to take his bat/ball and go home?

    It is only a matter of time untill the world finds another bat/ball to continue the game. The spoiled brat will not be invited to the next game.

  9. S

    As I sit here with the street blocked off so Bush can meet with Abdullah that is the tell. OF course the US is going to dismiss the call for regime change. Russia who can;t keep its market even open is calling for a new regime. The US is tanking the rest of the world with its malignancy exports (read $) and it is in US interest to do so to retian its stanglehold on hegemony. The meeting with abdullah tells you that Bush gets it. The ultimate arbitor will be the petro states and comodities in dollars. Once that goes so to does US suprememcy. So Bush and co calling for no change is anything but a shock. The problem for the US is that the system is bankrupt and will not be long tolerated regardless. Last gasps of a dying system

  10. Anonymous

    “What if China point blank demands the dollar to be demoted to the rank of North American Peso?… hmmm… Or would that be more like a promotion?…

    What would Paulson do then?”

    He should do nothing. Our policies are not determined by the Chinese, our policies are determined by Americans. I would gladly accept a lower standard of living to ensure that foreign governments with not the best intentions in mind do not control my government and by extension myself.

    Ultimately, the Chinese are going to stop buying treasuries at some point. Bernanke’s job, Paulson’s job, and Paulson’s successor’s job is to prepare us to be in decent shape when that day comes.

  11. Alfred

    The same way one cannot bully a terminally ill lung cancer patient into not smoking cigarettes, US leaders will not be bullied into vast concessions on a financial summit. Since Lehman it is absolutely clear that if the US financial system goes down the rest of the world goes down with it. It is like the cowboy from Texas said: “We are in this together….”
    But when we do come out of it together, the world according to greenback will be different. The mighty dollar will have lost its hegemony status and as an essential pillar the US will lose its World dominating status.

  12. Anonymous

    “Somebody somewhere is going to start a scheme to short the entire US/dollar system.

    The current structure is not sustainable.”

    Who has that kind of money to be on the other end of a trade that will certainly be propped up by governments around the world that have their financial interests aligned with the U.S.? Also, does said group or individual have adequate military protection? Such a manuever is essentially a statement of war. When Soros became the currency vigilante on Black Wednesday, he was pretty much declaring war on Britain.

  13. Alfred

    I thought about the military option as well. No single nation can successfully confront the power of the US military. In that case I suppose the World’s nations would rather comply with US leadership. The result of a military confrontation could lead to WWIII and that would mean annihilation of mankind. Of course, in this scenario everybody loses including the US. Given the two options, WWIII or losing world dominance, the latter seems more human.

  14. Anonymous

    To all the comments here about how America must “stand up” to the rest of the world, you are guys out of your mind?

    It is the reckless money printing and debt based consumption that got the whole world into this mess. A head in the sand approach will not get anybody out. Obama is being disingenuous by sending 2 nobody to meet world leaders. The good will the rest of the world have to toward him will evaporate in a matter of hours.

    While we are on the subject of G20 meeting, the only useful out come out of this will be a decision by the IMF to sell gold. Asia and gulf countries will buy that gold with the USD and these dollars will be used to bailout euroupe and US.

  15. Anonymous

    “Somebody somewhere is going to start a scheme to short the entire US/dollar system. The current structure is not sustainable.”

    Who has that kind of money to be on the other end of a trade that will certainly be propped up by governments around the world ?

    —–

    Right, I clearly don’t have the scheme.

    but I would imagine, it would be working on various hard peg on USD. (eg. Saudi’s Real) If that peg is broken, USD will sink.

    Just like when Yen is moving too fast, carry trade dies and a huge section of US financial market is under water paying Yen loan. (Iran a year ago told Japan they want Yen instead of Dollar for oil)

    Who has that kind of money?

    Soverign wealth, I thinkis large enough player. If Russia get their act together, they can move around $100-200B with ease.

    Or emerging a large free trade area that causes slack in US demand as mean of settlement (thus reducing c.bank reserve need)

    … all that are relatively large enough phenomena to alter US dollar function and crash it.

    I am not sure if any hedge fund can do it. I can’t imagine any scheme yet.

    but somebody somewhere I think has a method already cooked up.

  16. Anonymous

    ndk, why do you see Japanese acceptance of yen strength as contrary to multilateralism? It reminds me of their meek acquiescence late in the Reagan administration when they were pushed to let the yen rise to save western industrial interests. Are you thinking that carry traders are now the dominant interest group, and it’s them that Japan is defying?

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