G20 averts World Crisis.

Who would’ve thunk it? The G20 in a few short days have actually managed to reach agreement on some tangible actions and outcomes following the recent talk fest.

In reports in the MSM, the G20 leaders have promised to rein in corporate cowboys and set up a worldwide financial watchdog in a $7 trillion bid to solve the global financial crisis.

The centrepiece of the package is $US1.1 trillion ($1.58 trillion) in spending to create jobs and get banks lending to each other again. By the end of next year, G20 leaders will have spent $US5.5 trillion ($7 trillion – or $7,000,000,000,000) to save the world economy.

(It’s a lot of money).

Under the deal, a new Financial Stability Board will be set up to ensure international cooperation on regulation and introduce new principles on pay and bonuses for corporate bosses to ensure they reflect performance.

Prime Minister Kevin Rudd said the financial market “cowboys” who wreaked havoc on the world economy would be brought undone by the deal.

“It’s been prime ministers and presidents who have struck this deal but it’s small businesses, tradies and young people who will benefit from it over time because global action is necessary to support local jobs,” Mr Rudd said.

Treasurer Wayne Swan has refused to say exactly how much of the trillions of dollars of extra spending will come from Australia, but promised to cough up a “fair share”. “It’s a bit early to tell how much,” he said.

He has said the Financial Stability Board would include a group of “supervisors” to work with national watchdogs to make sure they managed the risk in their economies. He said the current crisis showed that unmanaged risk in one country was a threat to all.

French President Nicolas Sarkozy, who had threatened to walk out of the summit, said the agreement represented “a commitment by heads of state and government to strengthen regulation and supervision of financial activities”.

“A breakdown in regulation was at the origin of the financial crisis.”

The key pledges are:

– Immediate publication of a list of tax havens that don’t comply with information requirements as well as unspecified sanctions.

– The injection of an additional $US1 trillion into the global economy through measures including a $US500 billion increase in the funding available to the IMF, an increase in the availability of money for developing countries through the IMF’s “special drawing rights” to $US250 billion and a total of $US250 billion being set aside for trade assistance.

– The establishment of international colleges of supervisors for national financial regulation.

– Agreements to do whatever is necessary to promote growth, but with approaches individual to each country, ensuring the possibility of further fiscal injections if needed in future.

– The revamp of the IMF and other institutions to ensure nations such as China are given greater influence. Senior positions on the World Bank and the IMF will open to candidates from the developing world.

– A continuing commitment to continuing funds such as the millennium development goals.

– An extra $US50 billion for the world’s poorest countries

Clearly, there must’ve been a lot of behind the scenes negotiation for the leaders to reach such a conclusive list of specific actions – with the standout endorsement coming from France after initially threatening to walk away from the talks altogether.

The outcomes represent a real win for beleagured British PM Gordon Brown. Brown secured the support of both France and Germany and announced a package of six key pledges designed to boost the world’s economies and hasten the end of the financial crisis.

The tough new approach to tax havens – lists of countries that do not comply with anti-secrecy rules will be published almost immediately – also represented a win for the French President, Nicolas Sarkozy and German Chancellor, Angela Merkel who have campaigned strongly for the new sanctions.

These also include a common approach to managing “toxic assets”, radical reform of the banking system, new regulatory systems including a “financial stability body” to act as an early warning system worldwide and caps on financiers remuneration.

Mr Brown said the “old Washington consensus is over” and in agreeing to the six pledges, the G20 nations made their messages “clear and certain” to markets and communities world wide.

“This is the day the world came together to fight back against the global recession, not with words but with a plan for global recovery and reform,” he said.

“Today’s decisions, of course, will not immediately solve the crisis. But we have begun the process by which it will be solved … I think a new world order is emerging with the foundation of a new progressive era of international cooperation.” he said

New reforms of the global banking system, including institutions such as hedge funds, and other parts of the so-called “shadow banking system” coming under global regulatory control for the first time.”

The German Chancellor, Angela Merkel, said: “This is a victory for global cooperation … it is a victory for reason that the things that got us into this crisis are not allowed to be repeated. That is what I wanted.”

The G20 leaders will meet again in New York in September, when the IMF will report on the impact of the spending to date.

Personally, I’m encouraged by these developments,. and if the markets are anything to go by, this might just be the beginnning of the turning point of the global financial crisis.

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22 Responses

  1. I have just been advised that the way in which markets have responded this morning places us technically in a Bull Market.

  2. The German Chancellor, Angela Merkel, said: “This is a victory for global cooperation … it is a victory for reason that the things that got us into this crisis are not allowed to be repeated. That is what I wanted.”

    Sounds like there was a battle royale in getting it though, threatens of walk-outs etc. Good to see that the citizen protest had an effect on the outcome 🙂

  3. “Good to see that the citizen protest had an effect on the outcome”

    LOL!!

    Yes it made such a difference didn’t it..

    Still, gave a few glaziers some unexpected work I suppose…

  4. Call me crazy, but I’m starting to believe the conspiracy theories.

  5. “The outcomes represent a real win for beleagured British PM Gordon Brown. Brown secured the support of both France and Germany and announced a package of six key pledges designed to boost the world’s economies and hasten the end of the financial crisis.”

    God is truly an Englishman. Well at least one of them. We musn’t forget the other two, Rudd & Obama. It seems polytheism is alive and kicking.

    Hopefully they won’t be like SantaGrinch Costello and GIVETH to the not so rich…then TAKETH AWAY.

    Good post reb. I wonder how many folks are now furiously ringing their friendly tax haven and getting BEEP BEEP BEEP on the phone?

    I likey.

    N’

  6. I read that as “glaciers” and thought – WTF is reb on about. I am an ID 10 T.

  7. Senator Coonan was just on ABC Television and has said:

    We’re concerned that this is not a blank cheque for Mr Rudd to come back to Australia and to splash more money around and to plunge Australia into much greater debt and deficit,

    Sure she means that they are concerned that it IS a blank cheque. If it was not a blank cheque there would be no worries?

    I’m so confused?!?!

  8. Nasking,

    I’ve heard that Obama is being praised for having the guts to insist that the head of General Motors “had to go.”

    It seems like he really means business, in comparison to that old puppet of big business whats his name Double-ya…

  9. Yep Reb, giving Wagoner his marching orders was a must.

    The last time a US president took on a car-industry boss was when Roosevelt had a little chat with Henry Ford about allowing Unions into his factories after Ford thugs had shot several of them.

    As for the G20 deal: “the Financial Stability Board would include a group of “supervisors” to work with national watchdogs to make sure they managed the risk in their economies…”

    I sure hope these guys aren’t on bonuses.

  10. “I’ve heard that Obama is being praised for having the guts to insist that the head of General Motors “had to go.””

    Yes reb, I thought this was an interesting piece from Michael Moore the other day:

    ‘We the People’ to ‘King of the World’
    You’re Fired!
    By Michael Moore

    April 01, 2009 “Information Clearing House”

    http://informationclearinghouse.info/article22334.htm

    “It seems like he really means business”

    HOPE so reb. Obama has to STAND TALL & sack a few more CEOs who act like worshippers of Mammon.
    N’

  11. Meant to say reb, when I read

    ‘We the People’ to ‘King of the World’ You’re Fired!

    I got all excited…I thought they were talking about Murdoch

    😉
    N’

  12. Anyone know how the World Bank and the IMF operate? They’re nefarious corporations that have one interest – getting wealthy off the poor.

  13. Legion, Rupert isn’t the ‘Great Predictor. As I recall:

    The greatest thing to come out of Iraq for the world economy … would be oil at $20 a barrel

    As i recall, that was his position in February 2003 as cited in the Bulletin. In Fortune Magazine he said:

    Once Iraq is behind us, the whole world will benefit from cheaper oil ,,,

    While oil has come off its peak well and truly, the reality is far from the way Rupert predicted.

  14. Throw more money into the toxic asset pit. We should see more major ‘write offs’ globally as ‘It means we will have to stop pretending that bad bank assets are merely “impaired” and admit they are worth a fraction of their nominal value.’

    From Dan Henning at the Daily Reckoning:

    –Let the G20 leaders have their self-congratulatory moment in the New World Order sun. Their plan is a failure because it blames the credit crisis on de-regulation, fraud, free markets, and bad bankers. This is a deliberate attempt to obscure the origins of the credit crisis and the recession/depression we now face: the credit boom that preceded it.

    –Governments themselves were largely responsible for that credit boom. Their coordinated interest rate cuts and the dollar-pegged global currency system led to an explosion in money, credit, and inevitably, leverage, risk-taking, and now, losses. They are trying to prevent those losses by throwing more borrowed money at the recession to “fight it.”

    –That’s moronic. “A recession is the liquidation period following an inflationary cycle,” writes Harry Browne in “How You can Profit From the Coming Devaluation.” How right he is. More from him in a moment.

    –Don’t get us wrong. Greed and poor regulation certainly had a huge role in the credit boom. Leverage was allowed to go unchecked. Lending standards were lax and in many cases, non-existent. Ratings agencies gave gold-plated credit ratings to the collateralised assets flogged by Wall Street to pension funds, insurance companies, and Central Banks.

    –Mistakes were made. But it’s clear the G20 leaders have no desire to admit their Prime Mover role in the formation of the credit bubble which has now popped. It is politically unacceptable to endure a recession which liquidates the bad investments. It means you have to stop pretending that bad bank assets are merely “impaired” and admit they are worth a fraction of their nominal value.

    –Instead what you see is the G20 moving to consolidate the position of government as the most powerful and intrusive institution in your economic life. Their tax harmonisation efforts would normally be called anti-competitive collusion. But by branding nations that offer low tax rates as renegades, they hope to make it impossible (practically speaking) for you to move your money and your assets to places that treat capital well.

    –So yes. It’s just more of the same. A wealth and power grab. Steal from the future with borrowing. Rob from savers with inflation. Use the coercive power of the law to accomplish your goals. And wine, dine, and fly at taxpayer expense to achieve it all.

    –Realistically, we think this counter attack by Big Government to stave off the second wave of the credit crisis gives you time to sell stocks into a rally and diversify your assets ahead of the coming devaluations and inflation. Ultimately, the credibility of national governments and their currencies will be eroded and damaged beyond repair, based on unsustainable fiscal and monetary policies.

    –But for now they are pretending it will work and that everything is fine. Maybe that’s what they really think. Or maybe that’s all they know. “In thousands of years of monetary history,” writes Harry Browne, “only one temporary solution [to warding off recession] has ever been discovered.”

    –“Governments know only one way of holding back recession. What do you suppose it is? Yes, the only solution they can think of is to continue the inflation. The ‘boom’ is regenerated with more bank credit and government subsidies. Companies appear to come to life again.”

    –“Prices go higher, but in such irregular patterns that businessmen and wage earners are unable to make rational decisions from the distorted price structure. Inefficient businessmen stay in business with more credit-at the expense of other companies.”

    –We think Harry is right. But the question is, which prices? It doesn’t look like consumer prices will be rising any time soon. There is still massive global production over capacity.

    –But the money bomb dropped on markets by the G20–“more money than ever before,” said Gordon Brown-may sucker people back into the stock market and ignite a short round of leveraged risk taking. What should you do?

    –Well, Australia posted its second-largest trade surplus ever yesterday, according to the Australian Bureau of Statistics. The surplus was just over $2.1 billion. Exports were up 4%. But the big driver was not, say coal and iron ore but what the ABS called “other goods.” And what are they?

    –Well, “other goods” exports were up 49% to $816 million and the major contributor to that was gold. Aussie gold exports totalled $784 million for the period and were up 55%. So what does it mean?

    –The IMF may be selling gold. But we reckon a lot of people are happy to buy it. With the massive expansion in global stimulus, borrowing, and spending, we are approaching the next phase of this crisis. And we reckon when the G20 meets in New York again in September, they may not be smiling anymore.

  15. Rhetorical questions for Unca Rupie or Unca Scrooge, whoever has best access to the Delphic fumes…

    When do the next raft of those good ARMs re-set, does anyone know? Why has the FARB acquiesced to mark-to-model-like accounting? Anyone know how the US Federal Reserve thinks M3 is performing in the bear-mauling?

  16. Sounds toxic Legion? “It might be a matter of bring out your dead (bad debt). Watch when the write-offs come just how many vultures will have their hands out AGAIN. Please bail us out.

  17. barbararaisbeck, on April 3rd, 2009 at 1:52 pm

    I was reasonably sure that those kinds of behaviours by those institutions were retired with the demise of the ‘Washington consensus’; not least because the nouveau poor are presently in Washington and can’t realistically screw themselves over any more; so, it’s probably a convenient juncture in history that they announce their consent amid a new consensus for a radical departure from the rules that applied to everyone else for 60-odd years.

  18. Interesting comment, John. What will be very interesting is whether they’ll stick to their resolutions as the rosy glow fades and the GFC bites deeper. I don’t see it being sunshine and roses for some time yet. I hope they don’t lose their bottle.

  19. John McPhilbin, on April 3rd, 2009 at 3:31 pm

    (Thinking it’s more the case that The Masters of the Money Illusion are still trying to play Decade At Bernie’s, with a ‘W’ thrown into the recessionary mix to keep the graphologists off-and-on-and-off-and-on their toes.) Very much enjoying Bill Bonner’s back issues over at the Daily, John.

  20. The problem with large rallies? The concern now must surely be that this rally is based on nothing more than hopeful speculation and that another crash will lead to a prolonged depression of the market. All it takes is for the economy to keep reporting bleak data and at some stage a collapse in prices will burn some very major players – damaging their positions permanently.

    Wall St’s Dow has best 4-week winning streak since 1933
    http://www.theaustralian.news.com.au/business/story/0,28124,25287682-643,00.html
    Rob Curran THE Dow capped its best four-week winning streak since 1933 as investors gamble on an economic rebound, despite grim jobs data.

    US recession job losses top 5 million
    http://www.theaustralian.news.com.au/business/story/0,28124,25287669-36375,00.html
    THE US continued to shed jobs at an unrelenting clip in March, pushing total losses since the recession started 16 months ago past five million.
    The figures, which included another sharp rise in the unemployment rate to a 25-year high, are a sober reality check on the economy after some mildly encouraging news on housing, automobiles and manufacturing.

  21. Or, said another way, the market is now a large casino and some record bets are being placed.

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