An important G20-meeting (The London summit) is coming up. At that meeting there will be a lot of discussion on how to jumpstart the world economy. The meeting will (probably) also see fierce discussions on how to reregulate the financial sector.
At the core of the division of work and outcomes from this summit is the question of which is the most important cause of this crisis; global imbalances (China-US etc) or deficit regulation of the financial system coupled with a failure of market discipline? If you ask me, I think this issue will become central over the next couple of weeks. Not the least at the G20-summit.
Ideologically, I am a free-market spirit and dream about Somalia-like economies without regulation and government support (NB, here I of course compare free-wheeling Somalia with state-controlled Ethiopia and the likes, not with rich centrally run countries like Sweden). Pragmatically, however, I understand that this is something for our grand-children or grand-grand-children at best (unless, god forbid, we see a scaled up version of the European outcomes of the 1930s great depression that is……). Ignoring these unlikely scenarios there is of course no chance of governments around the world, neither voluntarily or by force, giving up their newly won supremacy at this stage. Therefore, at this stage of history I am convinced that government intervention is what we have to live with. Therefore, let’s make the best out of the situation and let’s spend the money as wisely as we can.
Now, I am quite sure that the global imbalance issue is less important than the deficit regulation/market discipline issue. I therefore hope this will be the outcome of the London summit, i.e. more and better regulation on a global scale. At least I find this much more appealing than pleas for global action on pumping up (short-lived) artificial demand and continued spending on piece meal bail-out package after bail-out package that one day has to be paid by us the tax payers through raised taxes and inflation (I don’t think there will be sufficient demand for all the debt issues, neither by the big and mighty countries nor by the small and irrelevant, waiting around the corner).
IMF seems to be of the same opinion (thanks Björn for sending me an excellent article on this). Like me, they argue that the global imbalances could not have caused the crisis without the failure of the regulative framework and the coupled excessive risk taking by financial institutions. Like me, they want an increase in the scale and scope of financial regulation, not the least when it comes to the shadow banking system. (I have stressed these things many times in this blog, s for instance Don’t blaim it all on the banks! where I discussed my view of the regulative mistakes.) The US government, meanwhile, seems to be of a diametrically opposite point of view. It will be interesting to see if they (still) have enough power to make (force) the rest of the world respond to their emphasis on global action!
