G-20 leaders to push for more regulations on Wall Street
Wednesday, 1 April 2009
A.F.M. Mainul Ahsan
THE U.S. economy shrank at a 6.3 per cent annual rate in the fourth quarter of the last year, the worst drop since the first quarter of 1982. For the 10th week in a row, according to data published on March 27, 2009, the number of people receiving jobless benefits in the U.S. grew and now stands at nearly 5.6 million. Same source shows that new claims for unemployment benefits rose again as well to a seasonally adjusted 652,000, up from 644,000 the week before.
In the US, unemployment rate touched 8.1 per cent in February, a 25-year peak but the recession is not over yet. Economists already predicted that the U.S unemployment rate would go above 9.0 per cent. That would easily surpass the 2001 and 1990-91 recessions but trail the 10.8 per cent rate of December 1982.
Unemployment rate in the U.K. hit 6.3 per cent in the fourth quarter of 2008, up from the boom's low of 4.7 per cent in 2005. Projections from forecasting firm IHS Global Insight show it will be climbing as high as 10.5 per cent in early 2011. Unemployment in Germany already crossed 7.9 per cent in February, and in Canada 7.7 per cent. On other hand, Japan's economy is expected to shrink by 5.8 per cent in 2009, while Europe's is expected to decline by 3.2 per cent and the United States' by 2.6 per cent. China's exports plunged more than 25 per cent in February 2009 compared with a year earlier, exacerbating fears among China's leadership about rising job losses and possible unrest among its people in different parts of the country. Today's global crisis already caused the world a loss of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months.
The global economic slowdown is so severe that worldwide the economy will contract for the first time since 1945, the International Monetary Fund (IMF) says. It also predicted that the total of goods and services produced around the world is projected to slump by 1.0 per cent in 2009, compared with a 3.2 per cent growth rate last year. The recession is already in its 15th month and by the mean time, the U.S. as well as the world recession grew deeper, broader and complicated than anything the world has seen since World War II. In such a situation, G-20 finance ministers already met on March 14th, 2009 in Horsham, London, to lay groundwork for a full summit of heads of state and government. Now leaders of G-20 countries, which represent more than 80 per cent of the global economy, are going to meet over the financial crisis in generations on April 02 in London.
If AIG fails, not only the U.S. but most of the countries in G-20 group will be exposed to systematic risk. So, since financial market is so interrelated today, governments should act together rather than alone to get out of the current turmoil. However, in the summit in London, the international community will be working to find common ground on three points: Boost demand, reform the world system of financial regulation, and increase the resources for the International Monetary Fund (IMF).
To boost demand, from the beginning U.S. is asking the G-20 governments to implement stimulus-spending programmes worth at least 2.0 per cent of their gross domestic products in the current year and next. IMF estimates that only Saudi Arabia, Australia, China, Spain and the United States will introduce budget boosts worth 2.0 per cent of GDP over the next two years. On the contrary, Europeans, especially Germany and France, are calling for better financial regulation, not government spending. Germany and France believe that the US's failure to oversee and regulate its financial system more carefully was the main factor that created the current economic crisis in the first place. Arvind Subramanian of the Peterson Institute for International Economics in Washington says that European leaders focus on more regulation rather than more government spending because the banking sector occupies a bigger role in their economies, and because they think U.S. free-market ideology needs to be reconsidered.
However, government spending without cleaning up the troubled assets wouldn't lead the US to a sustainable recovery. German Chancellor Angela Merkel has echoed this point at a joint press conference with French President Nicholas Sarkozy and said, "The issue is not spending even more but to put in place a regulatory system to prevent the economic catastrophe that the world is experiencing from being repeated." As a result, the U.S. already has unveiled its plan to work with the private sector to buy toxic assets of financial institutions.
Surely, Europe will be demanding more transparency and accountability to discourage improper risk taking by the financial executives like before. In the meeting in Finance minister's level of G-20 countries on March 14th, leaders were split over how aggressively to regulate hedge funds and private-equity firms. Several European countries want the hedge funds and private equity-funds that are big enough or complex enough to destabilize the financial system to be overseen similarly to that of the banks, while U.S. and U.K. officials favour more disclosure over more regulation to increase transparency. According to the current U.S. policy, it is voluntary for hedge funds, regardless of size to register with the government, i.e., Securities & Exchange Commission (SEC).
In response to European demand of strong regulation by the U.S. on its own financial system, the Fed and U.S. Treasury started asking to the Congress for more authority to oversee the financial sector. Federal Deposit Insurance Corporation (FDIC), jointly with other governmental agencies, wants more as well as unique authority to also oversee non-bank financial institutions. Until now FDIC only oversees banks that take deposits: if situation demands, FDIC takes over failed banks and then sells them to other interested parties after proper restructuring. The US Treasury Secretary is also seeking authority to regulate derivative market, hedge funds and private equity funds.
Most of the economists blame credit default swaps (CDSs), sort of insure against default on counterparties' loan, for taking the world in current mess. CDSs, which amount to several times the total world GDP, are mostly unregulated and used by financial and non-financial corporations to hedge risk.
Moreover, China is cautious more about its trillion dollar debt with the U.S. Treasury. If U.S. devalues dollar, China will suffer most. The Chinese officials already started to warn the U.S. officials about not to devalue dollar, and at the same time asking world leaders to think about an alternative sovereign currency that will replace dollar from the world arena of commerce. While the U.S. will be pushing for more worldwide stimulus measures, Europe will be asking world leaders to focus on stricter oversight. But one thing is clear: in London summit, the U.S. is going to be under fire by the leaders from all part of the globe, and will have to make promises for more regulation on the Wall Street firms. Wall Street will be changing for forever.
The writer can be contacted at mainul.ahsan@ttu.edu
THE U.S. economy shrank at a 6.3 per cent annual rate in the fourth quarter of the last year, the worst drop since the first quarter of 1982. For the 10th week in a row, according to data published on March 27, 2009, the number of people receiving jobless benefits in the U.S. grew and now stands at nearly 5.6 million. Same source shows that new claims for unemployment benefits rose again as well to a seasonally adjusted 652,000, up from 644,000 the week before.
In the US, unemployment rate touched 8.1 per cent in February, a 25-year peak but the recession is not over yet. Economists already predicted that the U.S unemployment rate would go above 9.0 per cent. That would easily surpass the 2001 and 1990-91 recessions but trail the 10.8 per cent rate of December 1982.
Unemployment rate in the U.K. hit 6.3 per cent in the fourth quarter of 2008, up from the boom's low of 4.7 per cent in 2005. Projections from forecasting firm IHS Global Insight show it will be climbing as high as 10.5 per cent in early 2011. Unemployment in Germany already crossed 7.9 per cent in February, and in Canada 7.7 per cent. On other hand, Japan's economy is expected to shrink by 5.8 per cent in 2009, while Europe's is expected to decline by 3.2 per cent and the United States' by 2.6 per cent. China's exports plunged more than 25 per cent in February 2009 compared with a year earlier, exacerbating fears among China's leadership about rising job losses and possible unrest among its people in different parts of the country. Today's global crisis already caused the world a loss of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months.
The global economic slowdown is so severe that worldwide the economy will contract for the first time since 1945, the International Monetary Fund (IMF) says. It also predicted that the total of goods and services produced around the world is projected to slump by 1.0 per cent in 2009, compared with a 3.2 per cent growth rate last year. The recession is already in its 15th month and by the mean time, the U.S. as well as the world recession grew deeper, broader and complicated than anything the world has seen since World War II. In such a situation, G-20 finance ministers already met on March 14th, 2009 in Horsham, London, to lay groundwork for a full summit of heads of state and government. Now leaders of G-20 countries, which represent more than 80 per cent of the global economy, are going to meet over the financial crisis in generations on April 02 in London.
If AIG fails, not only the U.S. but most of the countries in G-20 group will be exposed to systematic risk. So, since financial market is so interrelated today, governments should act together rather than alone to get out of the current turmoil. However, in the summit in London, the international community will be working to find common ground on three points: Boost demand, reform the world system of financial regulation, and increase the resources for the International Monetary Fund (IMF).
To boost demand, from the beginning U.S. is asking the G-20 governments to implement stimulus-spending programmes worth at least 2.0 per cent of their gross domestic products in the current year and next. IMF estimates that only Saudi Arabia, Australia, China, Spain and the United States will introduce budget boosts worth 2.0 per cent of GDP over the next two years. On the contrary, Europeans, especially Germany and France, are calling for better financial regulation, not government spending. Germany and France believe that the US's failure to oversee and regulate its financial system more carefully was the main factor that created the current economic crisis in the first place. Arvind Subramanian of the Peterson Institute for International Economics in Washington says that European leaders focus on more regulation rather than more government spending because the banking sector occupies a bigger role in their economies, and because they think U.S. free-market ideology needs to be reconsidered.
However, government spending without cleaning up the troubled assets wouldn't lead the US to a sustainable recovery. German Chancellor Angela Merkel has echoed this point at a joint press conference with French President Nicholas Sarkozy and said, "The issue is not spending even more but to put in place a regulatory system to prevent the economic catastrophe that the world is experiencing from being repeated." As a result, the U.S. already has unveiled its plan to work with the private sector to buy toxic assets of financial institutions.
Surely, Europe will be demanding more transparency and accountability to discourage improper risk taking by the financial executives like before. In the meeting in Finance minister's level of G-20 countries on March 14th, leaders were split over how aggressively to regulate hedge funds and private-equity firms. Several European countries want the hedge funds and private equity-funds that are big enough or complex enough to destabilize the financial system to be overseen similarly to that of the banks, while U.S. and U.K. officials favour more disclosure over more regulation to increase transparency. According to the current U.S. policy, it is voluntary for hedge funds, regardless of size to register with the government, i.e., Securities & Exchange Commission (SEC).
In response to European demand of strong regulation by the U.S. on its own financial system, the Fed and U.S. Treasury started asking to the Congress for more authority to oversee the financial sector. Federal Deposit Insurance Corporation (FDIC), jointly with other governmental agencies, wants more as well as unique authority to also oversee non-bank financial institutions. Until now FDIC only oversees banks that take deposits: if situation demands, FDIC takes over failed banks and then sells them to other interested parties after proper restructuring. The US Treasury Secretary is also seeking authority to regulate derivative market, hedge funds and private equity funds.
Most of the economists blame credit default swaps (CDSs), sort of insure against default on counterparties' loan, for taking the world in current mess. CDSs, which amount to several times the total world GDP, are mostly unregulated and used by financial and non-financial corporations to hedge risk.
Moreover, China is cautious more about its trillion dollar debt with the U.S. Treasury. If U.S. devalues dollar, China will suffer most. The Chinese officials already started to warn the U.S. officials about not to devalue dollar, and at the same time asking world leaders to think about an alternative sovereign currency that will replace dollar from the world arena of commerce. While the U.S. will be pushing for more worldwide stimulus measures, Europe will be asking world leaders to focus on stricter oversight. But one thing is clear: in London summit, the U.S. is going to be under fire by the leaders from all part of the globe, and will have to make promises for more regulation on the Wall Street firms. Wall Street will be changing for forever.
The writer can be contacted at mainul.ahsan@ttu.edu