And with appropriately idiosyncratic commentary from me. This goes on for quite a while, so I'm going to hide it, trusting to Your Dopamine Pathways that you will not be able to resist Seeking it. There is a discussion at the end about transnational regulatory governance networks and what they mean for these meetings as exercises in a straitened form of global governance - which I suggest, not. And bonus discussion of Banking Institutions that are Too Big To Fail because they Operate Galaxy-Wide, and whether transnational regulators are a precursor to the United Federation of Planets and, finally, the terrible, terrible idea, perhaps the worst bit of social utopianism in the Star Trek universe (besides the ostensible un-necessity of money that Co-Blogger Ilya has already discussed and discounted), Memory Alpha ....
The principal policy debates at the G-20 meetings were over bonus/compensation issues for bankers (pressed hard by the Continental European countries, France and Germany in particular), and revisions to tighten and raise capital standards for banks and financial institutions (pressed by the United States). As this WSJ news story noted today - echoed by the Post and the NYT - the results were mostly general agreements in principle that stopped short of concrete commitments. If that sounds like the general history of G-xx final communiques, well, this one (here is the pdf) is right in the middle of the bell curve.
On banker bonus/compensation issues, the final communique urged general caution but stopped short of endorsing caps on compensation. For Germany and France, the banker bonus issue is largely a matter of domestic electoral politics, constituencies to whom it would be politically helpful to say that Sarkozy and Merkel had brought about a cap on greedy banker salaries. For the US and Britain, the issue of banker compensation is not absolute compensation as such, it is the structure of incentives vis a vis risk, and long term risk versus short term compensation. That is almost certainly the predominant view among financial regulation experts in the US, at least, and the predominant view among the Obama senior economics team.
On capital standards for financial institutions, more agreement was reached in principle because there is wide agreement among the leading parties that all these institutions need to tighten capital standards. This has two aspects in the global finance regulation debate, however. First is the need of each national regulator, and the institutions under its supervision, to tighten capital standards. That is happening, even though there was great concern a year ago that countries would find ways direct and indirect to have "their" financial institutions (i.e., ones providing large amounts of credit and leverage within a particular national economy) benefit from some other national system's rescue operations. But clearly there are coordination issues today as among central banks and regulators of particular national systems.
Second, however, there is the question of global capital standards and what they should be, given that Basle II standards have not performed so well, or at least have been easily gamed to the point of providing regulatory cover for massive leverage. But implicit in that discussion are more fundamental discussions of whether
-a Basle style 'one-size-more or less-for-all' is necessary or a good idea, or is instead something that actually lends itself to gaming across the heterogeneous national economies in the world, particularly given its risk-weighting approach;
-what the standards would look like as a qualitative matter (i.e., what kinds of instruments count as what kind of capital and under what circumstances); and finally,
-whether there is any point to trying to put a quantitative limit on leverage by regulated or insured financial institutions or systemically connected institutions beyond which (if you could find a way to measure such a thing), the leverage is just ... Unnatural and ought to be Prohibited Per Se.
Call this last point the ... Unnaturalness Limit. The WSJ says:
The biggest surprise [of the conference] was the declaration by the officials that more needed to be done to boost banks' capital cushions "once recovery is assured." They said banks should hold more—and better quality—capital, meaning banks are likely to be urged to raise more equity rather than other more exotic instruments developed in recent years.
In a victory for Mr. Geithner, who launched an initiative to boost bank capital on Thursday, there was also agreement that leverage of international banks—the ratio of their total equity to their total assets—should be capped. Currently, most European banks follow capital ratios which depend on risk-weighted assets: assets weighted according to how risky regulators think they are.
I do count that as a victory for Geithner - managing to secure language favoring a leverage cap while avoiding endorsing a compensation cap. Still in my view, for what it's worth, a leverage cap that is reasonably absolute, fixed, measurable, and real for international banks is highly unlikely at the global level. That's just a political assessment of different national economies and their interests; take it for what it's worth.
Yet of course the idea of an absolute cap on leverage, or minimum of agreed upon risk capital, is something that national regulators addressing systemic risk are trying to come to grips with, each in its own way. As far as I can tell, that's true of the Europeans, as much as the Americans, as they consider the ways in which the 'relative levels of risky assets' can be played into leverage if credit is available within the global system. And directly and indirectly, leverage is the essence of the whole systemic risk regulator (or, more precisely, systemic risk discernor) debate. I'm not aware of any analytically defensible way of setting the Unnaturalness Limit, and I take entirely seriously the larger problem raised by people from Soros to Greenspan and beyond, that you can't just look at past market prices and discern the bubble, or, at a minimum, there's little reason to believe that regulators can do it better than market players (but only if they are on the line for risks taken).
On what analytically defensible basis do you say, that amount of leverage is okay and not creating or part of a credit bubble, but this amount ... well! And yet anyone trying to grapple with the problem is surely convinced, analytics or their lack aside, that once you get into the Lehman or Bear Stearns levels of leverage, or even headed in that direction, someone in our newly chastened, de-leveraged, less risky, more prudent world is supposed to pull the plug, with or without an analytic model to justify it, at least if the world remains full of institutions Too Big To Fail.
But for all those reasons, real universal leverage caps are least likely to be part of a global regulatory re-configuring of capital standards. 'Universal caps' undergirded by what amounts, however, to 'casuistical regulation' don't seem to me likely on a global basis. Maybe I'll turn out to be wrong on that, however.
The third thing that the G-20 final communique signaled - once again a priority of the United States - was a commitment to global fiscal stimulus. It is a matter of substantive disagreement as to appropriate policy (the US wanting everyone to spend at least as freely as it, and Germany in particular saying no); policy appropriate to particular national economies (the prior condition of one's national balance sheet, for example, having some bearing on the matter, among many other things); but also a genuine fear (by the US especially) of global free riding. The appropriateness of the policy itself is obviously disputed (it seems to me it will be years before that can be sorted out in a truly scholarly fashion), but that then feeds into the free-riding disputes.
The final communique in one sense aims to dispel that by a show of unity; on the other hand, it equally raises all the defection issues if countries perceive their interest to be agreement at the G-20 final photo-op and a different policy once back home. After all, for Germany and others - especially those economies that are already back in positive growth - the question of a "stimulus exit" has raised its head. Notice how one economist framed the issue:
[G-20 officials] also agreed on the need to prepare for the withdrawal of those stimulus measures. But while officials said they will develop "cooperative and coordinated" exit strategies, they also recognized "the scale, timing and sequencing of actions will vary across countries."
Economists said that leaves room for individual G-20 members to remove stimulus measures when they judge the recovery to be secure. "Although it sounds like there might be coordination, the reality is there might not be coordination at all," said Stephen King, HSBC's chief economist.
That leaves open the possibility that central banks will raise interest rates and governments move to cut fiscal stimulus at different times and to different degrees, affecting foreign-exchange rates and bond yields in unpredictable ways.
The fourth issue, global trade, seemed to me underplayed at these meetings, unless I missed something. Announcements have been made to get Doha moving again, and the US has named a new WTO ambassador. But it appears to me, at least, that leading governments concluded that trade was gradually coming back and, more important, the WTO framework has managed to hold through the crisis. If that was their thinking, it seems to me right. Hence it seemed less important in this setting.
The fifth issue is governance of the international financial system, meaning in this case the institutions of the World Bank and the IMF, and the general integration of the BRICs into the senior tiers of these systems. There is a related question of the greater integration (or, more fundamentally, the desirability of greater integration) of developing world states that are not BRICs (i.e., not necessarily newly emerging economic powers, but instead "consumers" of the institutions' services and capital) into their governance. If there was much movement on those issues, I missed it, but perhaps I am mistaken.
The net effect is that for the moving agenda of capital standards, in particular, the action shifts forward to meetings in a few weeks in Pittsburgh, September 24-25, in which the transnational regulatory network of financial officials established by earlier multilateral financial crisis meetings, the Financial Stability Board (FSB - student note: not to be confused with the US Financial Stability Oversight Board and even less with the US accounting authority, FASB!), and other regulators will meet to try and coordinate the actual specifics of policies. It's a meeting of leaders, President Obama presiding, for which the current meetings are in theory a warm-up, but it appears that the most important discussions will be among the sub-deb regulatory networks.
And ... so what, if anything, does this suggest about transnational networks, at least in the area of financial regulation and financial crisis management? The G-20 performed according to the standards of the G-20, viz., as an exercise in multilateral diplomacy, not governance. On the standard of multilateral diplomacy in a particular area in which there are considerable incentives to beggar thy neighbor - but only within certain (unclear and probably overly-) broad boundaries, for fear of upsetting the apple-cart of mutual benefit - it performed perhaps a little better than usual.
It was better than, say, Gleneagles and all that windy, pompous verbiage by the G-8 that resulted in little to nothing about its ostensible topic, African poverty (but that was because Gleneagles was about altruism, or the appearance thereof, not mutual benefit) (and, okay, fair enough, the current meeting was of finance ministers, not the presidents or prime ministers). As an exercise in supposed multilateral governance, by contrast, it is hard to see any evidence that this G-20 meeting was that, or was ever intended to be that by any of the leading national politicians, Sarkozy and Merkel included. This particular subject matter, that is, seems to me to fit Eric Posner's model of international law pretty well.
This is not to suggest that the FSB and other transnational regulatory groups will not achieve useful, indeed, possibly extraordinarily practically useful, levels of coordination of policy and prevent some amount of preventable defection, free riding, and beggaring of the neighbor. But that's not 'governance', at least not in the sense that international law advocates often mean the term, precisely because the effectiveness of the measures depends upon them being understood by all concerned not the threaten sovereign relationships and prerogatives, and that because they are explicitly and implicitly structured so as not to lead incrementally to 'governance'.
The FSB and all its brothers and sisters are not, in other words, the European Coal and Steel Community. Their ability to do what they might conceivably do well depends upon everyone taking that as the stated or at least unstated premise. Coming up with some useful coordination of policy on capital standards and leverage for Too Big To Fail Banks that Also Operate Galaxy-Wide would be quite enough, thanks. But (and this is the 'Burkean but') it won't happen if anyone of any importance is dreaming of these networks as Historical Precursors to the United Federation of Planets.
(The link will take you to Memory-Alpha, which was, however, surely one of the most foolish ideas in the whole Star Trek universe, a single, apparently non-redundant repository of all knowledge of the Galaxy on a little, itsy-bitsy planetoid ... and, because of the high ideals of galactice peace, undefended at that!)
[Cross posted in somewhat different form at Opinio Juris.]