Leaders from the G20 nations, which represent 85% of the global economy, will hold an economic summit in Pittsburgh this week to determine how they can keep the economic recovery on track while rebalancing growth and imposing new regulatory restrictions on banks.
U.S. President Barack Obama and his overseas counterparts will meet for the third time in less than a year on Sept. 24-25 to agree on a plan to compel banks to hold more capital reserves and curb risky trading techniques to prevent worldwide economies from falling back into the worst crisis since the Great Depression.
In addition to the regulatory accords, the officials will address a new initiative from Washington to create a revised economic framework and wean the global economy away from decades of U.S. over-consumption.
As he made the rounds on network news shows on Sunday, U.S. President Barack Obama took time out from pushing his health care overhaul to say he would urge world leaders to reshape the global economy.
The proposed framework, disclosed in a White House letter obtained by Reuters, would be aimed at 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 U.S. and other western economies were incurring giant fiscal deficits.
"We can't go back to the era where the Chinese or the Germans or other countries just are selling everything to us, we're taking out a bunch of credit card debt or home equity loans, but we're not selling anything to them," Obama said in an interview with CNN television.
"That's part of what the G20 meeting in Pittsburgh is going to be about, making sure that there's a more balanced economy," Obama said.
With U.S. consumers increasing their savings and curtailing spending after the housing bubble popped and unemployment soared, the new plan encourages other countries to fuel the next round of growth.
Furthermore, the downturn that paralyzed economies for the last year has convinced leaders that the global financial system is so intertwined that consensus action is the only way to address the problems, G7 sources told Reuters.
The Obama proposal designates the International Monetary Fund (IMF) to head up a peer review process to assess economic policies and then hold G7 countries accountable.
But getting Europe, the United States and China to swallow IMF directives on economic policies may be difficult, European Central Bank President Jean-Claude Trichet told Reuters.
"The most difficult question is still open: Europe, America, China, are they ready to modify their macroeconomic policies in the future — by following the advice of the IMF and under pressure from their peers, for the common good, and world economic stability?" he said in the French newspaper, Le Monde.
The meeting also will be marked by pointed discussions aimed at overhauling banking regulations, which could deplete bottom-line profits and deflate stock prices.
The G20 leaders will discuss measures to limit the way banks trade securities and restrain them from investing in such risky derivatives as credit default swaps (CDOs), which forced the collapse of Lehman Brothers Holdings Inc. (OTC: LEHMQ), setting off a worldwide recession and spurring a number of government sponsored bank bailouts.
Investors may take losses if financial companies have to issue more equity, Charles Goodhart, a former Bank of England official and now a professor at the London School of Economics told Bloomberg News.
“Banks will have to raise more capital by issuing more equity so existing stocks will generally go down,” Goodhart said. The IMF estimated in April that U.S. and European banks would need $875 billion in extra capital.
But as reported in Money Morning last week, many investment banking firms are turning huge profits by employing much of the same risky behavior that led to Lehman's undoing.
“We're seeing the same kind of behavior from the banks, and that could lead to some huge and scary parallels,” Simon Johnson, former chief economist with the International Monetary Fund, told CNBC.
That leads some analysts to conclude that new regulations are needed even if bank's profits are diminished in the process.
“Regulation will make banks less profitable by increasing the cost of doing business,” Andrew Clare, a professor at Cass Business School in London and a former Bank of England official, told Bloomberg. “If banks are going to benefit from taxpayer largesse then they need to act in a way that doesn't hurt taxpayers or the economy.”
Limiting executive compensation will also be on the G20 agenda as U.S. and European officials continue to press for new rules to limit bankers' pay and bonuses after governments used taxpayer funds to rescue banks.
A U.K. poll conducted this month by YouGov showed 73% of voters want a tax imposed on all bonuses over 10,000 pounds. In June, a Gallup poll showed that 59% of Americans wanted new laws to limit executive pay, Bloomberg reported.
But heavy lobbying by the banking industry and a distracting health care reform debate has hampered attempts to bolster U.S. regulations.
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