The leaders of the world’s 20 largest economies will have lots of gloomy news to chew over in Washington on Saturday—from slowing growth to swelling bailouts. Nothing grand is likely to emerge from the sessions, especially as the host, George W. Bush, is on his way out and the world’s soon-to-be-most powerful man, Barack Obama, is diplomatically staying away.
Click here for breakingviews.com
Still, there should be enough heavyweights there—including Nicolas Sarkozy and Gordon Brown, the French and UK leaders—to come up with some basic principles. Here are four suggestions, two bitter and two bittersweet.
First, politicians should admit that painful structural adjustments are necessary. A lot of the growth in recent years was unhealthy. Distended trade deficits in the US and the UK financed too much consumption, too many houses and too little investment in manufacturing.
Meanwhile, an artificially depressed currency kept uneconomic Chinese exporters in business.
Also, easy money supported sky-high commodity prices, which let countries such as Russia and Iran get too rich. Good times were too kind to the hotel and gambling trades, and not harsh enough on the US auto makers. In much of the world, finance and anything to do with real estate grew vastly out of proportion.
At least some of these excesses need to be reversed, an economic gear shift that will bring recession and higher unemployment. The G-20 should tell the world that it will need to live through an economic night before the dawn arrives.
Second, the G-20 members should make it clear that they won’t let the credit crisis stretch that night out unnecessarily. A healing recession should not become a destructive slump. What is required is an “in-and-out” commitment to financial support.
The “in” part is already well advanced. The total value of programmes from central banks and governments is now several trillion dollars. There are signs that the financial system may be over the worst, but its recovery is still too slow. More support may be needed. So the G-20 should commit to providing further help for countries in trouble and banks in need of capital. The politicians should also pressure banks to increase their lending.
The “out” side comes later, but should be sketched out. By the time this recession is over, governments will have lent to, or hold equity in, too many banks and companies. That will hurt the economy. The enlarged government role may be the unfortunate result of past lax oversight. But inadequate regulation should not be replaced by central planning. There should be timetables for governments to sell their stakes and get their loans paid off.
Third, the leaders should do something that comes naturally to politicians—offer goodies to voters. Fiscal stimulus, whether through tax cuts or carefully targeted additional spending, is necessary to supplement more direct support of the financial system. The prospect of generous help from governments should reduce widespread fear among consumers and companies, which is causing them to cut back spending, making a bad situation worse.
The political sweetness of this deficit spending should be tempered by a bitter consideration. Too much government borrowing is risky. It can lead to currency crises and higher inflation. And the sums involved are large. To fund its deficit and its financial support programmes, the US is already expected to issue $1.5 trillion of new debt next year, 30% of the total now outstanding.
Though absent, Obama should be particularly receptive to a fourth piece of advice for the leaders. He can take the lead on rethinking the way the financial world works. The previously prevailing model—overly light regulation, unchecked international flows of speculative investments, lax monetary policy—has failed miserably. It’s time to develop a new approach.
That sounds fun and challenging, just the sort of thing that people dream of when they go into government. But the work will also be embarrassing for many whose past policies led to the current crisis. They will have to admit their view of the financial world was fundamentally wrong. Admitting failure may be bitter, but it is better than repeating it.