In the midst of G20 euphoria who can assess the effectiveness of its efforts to stabilize the economic turmoil? When the dust settles it will be people, not governments, who decide how successful the sweeping measures have been. Confidence, after all, is a feeling – and it’s beyond government control. Only when confidence returns to the High Street will people become consumers again.
supervising rating agencies so that they can’t profit from tagging ‘Triple A’ on spurious securities
At the aspirational level G20 cannot be faulted: an end to unsustainable asset and credit bubbles and arming supervisors with weaponry to prick them; enhanced capital cushions for banks; risk management without greed-driven incentives; tough regulation to control excesses in hedge fund activity; and supervising rating agencies so that they can’t profit from tagging ‘Triple A’ on spurious securities.
Even accounting will come under higher regulatory supervision so that its arcane absurdities do not again act pro-cyclically to conceal systemic economic weakness. Taking note of the USA decision to abandon rigid application of fair value accounting would be a good start.
Making it real
The real test, however, lies in the translation of this inspired wish-list into a system that works because of public trust in its integrity, managed by regulators dedicated to preventing a return to the tarnished practices that bedeviled every feature of the financial world.
Saints are thin on the ground, but public trust in a reformed system will be gained and maintained only when those in charge are seen to be free of any taint of conflict. The perception is widespread: it is hypocritical for those who enriched themselves on the altar of falsely created wealth now to be appointed to root out the very practices on which they personally thrived.
The same ruinous syndrome encouraged regulators to turn a blind eye on patently corrupt practices in anticipation of irresistible employment prospects in the private sector; the flaky lure of easy enrichment robbed non-executive directors of their independence when they should have been applying their critical faculties to what the executives were up to; and it was fear of losing lucrative audits that led some firms to accept, rather than expose, accounting chicanery.
Even at the height of President Sarkozy’s peroration, on his determination to clamp down on international tax havens and “to put morality back into capitalism”, we read reports on the respected “Rue 89” news site that in his previous job as a lawyer he helped his wealthy clients to open secret bank accounts in Switzerland. Such activities are of course entirely legal. It is only the desperation of governments to get their hands on the money that brings tax havens into today’s firing line.
Freeing markets from corruption
The theory of market economics still stands. But events have shown that market fundamentalism is a sham if the players are corrupt. They will steer capital seeking a home into fake instruments built on sand rather than infrastructure that will benefit everyone. This side of Utopia, can it ever be reformed?
If the grand world order to which G20 leaders aspire is to become real, it is at street level that the perception must match its workings. Nothing else will dispel the malaise that pervades everyday consciousness. Regulation, governance, supervision and audit – they will all have to change up a gear and be subject to vigilant compliance, as never before.
None of this is of much relevance if the multi-billion pound quantitative easing and bank bail-outs don’t fix the economy. Who is going to buy all those government bonds? If the markets are to be believed McDonald’s corporate bonds are currently more creditworthy than Treasury bonds issued by Her Majesty’s Government. Really? Well, to insure £1 million of McDonald’s bonds on the credit default swap (CDS) bond insurance market the premium is £6,240 per annum. To insure £1 million of UK government bonds against default will cost you £15,710. A message in there somewhere?