The reality behind the public face of the world’s financial powerhouses comes under the spotlight here.
Power is always fought for, rarely conceded!
Christina
On this subject, shortly I shall be circulating Niall Ferguson’s “No such thing as ‘too big to fall’”. He is a British historian who specialises in financial and economic history. This takes a detailed look at the whole structure of banking and the various partisan nostrums put forward. I recommend it when you get it NOT as a blueprint but as a great aid to careful and considered thought.
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TELEGRAPH 6.10.09
The reality behind Istanbul co-operation is a global economic policy split by self-interest
We seem to have retreated from the precipice, but what does this brave new, post-financial crisis world hold for the future?
By Jeremy Warner, Assistant Editor
I've spent much of the past week taking the pulse among political leaders, policy-makers and bankers here in Istanbul for the annual meetings of the International Monetary Fund and World Bank.
The collective mood is overwhelmingly one of relief, mixed with not a little self-congratulation – relief that thanks to massive policy intervention, the collapse of the banking system and a second Great Depression have been averted. Policy-makers are keen to take the credit.
Common adversity has united the world in fighting the recession, yet already there are cracks appearing in the global consensus. With the immediate crisis over, self-interest is reasserting itself. Divisions over the reform agenda for the world economy and the banking system are again all too apparent.
What's more, to the extent that there is some sort of recovery taking hold, it is almost wholly down to the exceptional monetary, fiscal and financial system support of public policy. What happens when it is removed, as it must be with the rapid accumulation of potentially ruinous fiscal deficits throughout the developed world?
With such all-embracing questions yet to be resolved, the IMF itself seems to be retreating back into old squabbles over process, quotas, board representation and seats at the table.
For its part, Britain insists there is no question of giving up its seat. Why should we?, asks Alistair Darling, the UK Chancellor. Britain's contribution to the IMF is substantial. No taxation without representation, he declares in what UK Treasury officials have already dubbed "the Bosphorus tea party". Much the same view is taken by France and Germany, yet something has to give.
The pettiness of this debate as the world economy fights for recovery almost defies belief, but actually it is only indicative of wider tensions reasserting themselves. With his domestic political audience in mind, Mr Darling claims there is unanimity between the 186 nations represented at the IMF to continue with stimulus measures until the recovery is assured. The Chancellor contrasts the apparent international consensus over leaving the stimulus in place with demands by the Conservative Opposition for spending cuts to address the fiscal deficit, which he calls "entirely wrong and downright daft".
Yet the rhetoric on co-ordinated "exit strategies" belies the underlying reality. It's been easy to co-operate as long as self and common interest have coincided. With growing alarm over runaway public debt, these interests are fast diverging again. In the end, countries will do what they think appropriate for their own economies.
Despite outward commitment to maintaining the support measures, even the present British government will be withdrawing some of its fiscal stimulus at the end of this year, when the VAT relief comes to an end. In China, the "exit strategy" is already under way, with credit and public spending being reined in to counter asset-price bubbles and what by Chinese standards is rampant consumption.
There are mixed views about the pace of the recovery, but one thing is plain; it is already more pronounced among the major developing nations than older "advanced" economies.
Jim O'Neill, chief economist at Goldman Sachs, reckons that half the 4pc growth he's predicting for the world economy next year will come from China and India alone. China won't wait for the West to recover before taking action to dampen overheating in its own backyard.
For the longer term, there is little agreement over how to achieve the more "balanced" world economy the IMF advocates. Despite lip service to curing "imbalances", none of the big surplus nations [notably Germany and China -cs] accept culpability in the crisis, nor do they think there is anything wrong with their export-led economic models.
I always worry when bankers and policy-makers declare that the abnormal is "manageable". That's what was said about the explosion in credit and property prices that led up to the crisis. Now it is being said about the unprecedented levels of national debt to rescue the banking system and fight the recession.
For the moment markets seem happy to finance these deficits on relatively good terms. But that's only because the outlook for inflation is, for the time being, benign and because the banking crisis has caused private demand for debt to shrink. In Britain and the US, it is also because debt markets are being supported through quantitative easing.
Don't worry too much about public debt, the legion of bankers camped out in the best Bosphorus hotels counsel, as well they might. Like bees to a honey pot, many are here for the very purpose of selling sovereign debt to the myriad of national governments represented at the IMF. Whole floors have been taken over to sweet-talk the foreign dignitaries into sovereign debt mandates. From the sublime to the ridiculous, the bankers also hope of to win mandates to raise capital and funding for each other. Don't panic about debt, they say. Panic instead about the threat of deflation if the stimulus is withdrawn too soon. The debt will take care of itself. It all sounds unnervingly familiar. Even the IMF concedes there is a real risk of fiscal crisis in advanced economies if the recovery stalls.
Finally, the bankers are here to influence the reform agenda. For the past year, they've hardly dared show their faces in public. Now they are becoming ever more vociferous in challenging the new capital, liquidity and leverage controls about to be dumped on them.
Policy-makers want to make banks safe to fail at no cost to the taxpayer, depositors and the wider economy, yet they also want to withdraw public support for the banking system and for banks to return to the old normality of providing cheap and abundant credit.
Unfortunately, there is no cost-free way of making banks safer. To the contrary, by making credit more costly and less available, much of the reform agenda threatens to undermine growth and private-sector job creation.
The immediate crisis may be over, but rarely has our economic future looked more uncertain. As a rule of thumb, there is no mess quite so bad that government intervention isn't capable of making even worse. Maybe this time it worked and saved the world. Yet the consequences, many of them unintended and unforeseen, are going to be with us for an awfully long time, and they are most unlikely to be benign.
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