G20 Nations Agree To Rein In Financial Industry Excesses

Announcing its new and stronger role, a consensus of the G-20 is calling for changes that would attempt to stymie immoderation in the financial markets that led to …

Announcing its new and stronger role, a consensus of the G-20 is calling for changes that would attempt to stymie immoderation in the financial markets that led to the recent economic debacle, a sentiment reiterated by Treasury Secretary Geithner.  Vowing to confront the economic imbalances in exports and currency reserves while popularly targeting lavish executive pay packages, actual reinforcement of the G-20’s lofty objectives remains in question. See the following article from Money Morning, for more on this.

The G-20 summit in Pittsburgh concluded Friday with agreements to restructure policies to sustain the economic recovery and to install new banking regulations to prevent a repeat of the biggest financial meltdown since the Great Depression.

Also, the G-20 announced that it would become the permanent council for international economic cooperation, eclipsing the G7 and G8 – institutions dominated by rich Western economies.

“It’s a reflection of the world today,” a senior U.S. administration official told The Wall Street Journal. “It’s basically pulling international cooperation into the 21st century.”

As expected, the G-20, representing countries with 85% of the world’s economic activity, agreed on a new set of principals to rein in financial industry excesses that triggered the credit crisis two years ago.

The agreement calls for an increase in that capital reserves banks must keep on hand to offset potential losses from risky trading strategies or investments.

Secondly, they agreed to limit executive pay and bonuses by linking them to bank profits and calling for the return of cash bonuses if earnings don’t meet expectations, according to a draft of the statement obtained by The Journal.

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The document suggested linking pay to “long-term value creation, not excessive risk-taking,” and said the regulations should be finalized by 2010, and then phased in over the following two years.

Calls for new banking regulations provide leaders with political cover as they try calm public anger over governments using taxpayer funds to rescue banks. Fanning that anger is that many of those same financial institutions are already employing the same risky investment strategies and paying out the same gratuitous bonuses they were before the crisis.

Treasury Secretary Timothy Geithner said there’s strong sentiment among the leaders to fix the system before a reoccurrence of past events.

“We are not going to walk away from the greatest economic crisis since the Great Depression and leave unchanged, and leave in place, the tragic vulnerabilities that caused this crisis,” Geithner told reporters.

A U.K. poll conducted this month by market research firm YouGov PLC showed 73% of voters want a tax imposed on all bonuses over 10,000 pounds. In June, a Gallup Inc. poll showed that 59% of Americans wanted new laws to limit executive pay, Bloomberg News reported.

But keeping the economic recovery on track remained in the spotlight, as the leaders focused on addressing the imbalances in the global economy that caused the financial meltdown – notably the big export surpluses and currency reserves sucked up by huge exporters like China, as the United States and other Western economies incurred giant fiscal deficits.

The rebalancing act calls for developing economies to stimulate more domestic consumption while encouraging developed economies with big deficits – like the United States – to increase their savings rates.

The summit agreement recognized the growing clout of developing nations including China, Brazil and India by giving them increased power in voting at the International Monetary Fund (IMF).

In order to facilitate the moves, the G-20 called for a system of “peer reviews,” a procedure where G-20 countries assess whether each other’s economic policies are working, and the IMF provides technical advice.

The reviews will assess how the policies contribute to “strong and balanced growth” of the world economy, a senior G-20 official said.

There is some doubt, however, exactly how the agreement will be enforced. The sticking point is that the new rules rest on the premise that countries would consent to rules imposed by the G-20 on how to run their domestic economy.

The initiative to formalize the G-20 as “the premier forum for international cooperation,” over the G-8 group of richer nations, was pressed by U.S. President Barack Obama to appease China and India, which have chafed at being left out of G-8 gatherings.

Obama has been pushing world leaders to rebalance the global economy and recognize the increasing importance of China and other large developing countries ever since his election last November.

This article has been republished from Money Morning. You can also view this article at
Money Morning, an investment news and analysis site.

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