Will ‘It worked’ come back to haunt G20?

PITTSBURGH (Reuters) – The G20 may face a “mission  accomplished” moment akin to former President George W. Bush’s  premature declaration of victory in Iraq unless leaders quickly  make good on pledges for substantive financial reforms.

Leaders from the Group of 20 rich and developing nations  were so confident they had succeeded in tackling the global  financial crisis and recession that they included in the  preamble of their final statement on Friday this bold, two-word  declarative sentence: “It worked.”

“It’s hubris,” said Simon Johnson, a former chief economist  of the International Monetary Fund.

Johnson, who is now a senior fellow at the Peterson  Institute for International Economics in Washington, listed  possible pitfalls including growing losses on commercial real  estate loans, the need to recapitalize European banks, and  stubbornly high unemployment in most developed countries.

Any of those has the potential to trigger an economic  setback serious enough to force a re-thinking of policy. Even though G20 leaders insisted they were on guard against  complacency, Johnson said they may have assumed success too  soon, much like Bush’s infamous May 2003 Iraq speech on an  aircraft carrier in front of a banner that read “mission  accomplished.”     “What can you point to in terms of real regulatory reform  since April?” Johnson said, refering to the last G20 leaders’  summit in London.

The G20 acknowledged there was considerable work to be done  to make the global economy less susceptible to crises, and said  they would work toward “growth without cycles of boom and bust  and markets that foster responsibility not recklessness.”

Mustering the political will back home to put in place the  necessary rules won’t be easy, particularly in the United  States where the contentious issue of reforming healthcare  holds the attention of Congress and regulatory overhaul seems  to have been relegated to the back burner.

Anil Kashyap, an economics professor at the University of  Chicago’s Booth Graduate School of Business, said he would give  the G20 an “incomplete” grade.

“It’s too early to tell whether they’ve got a reasonable  exit strategy for unwinding some of the things they’ve done,  and it’s really unfortunate that they haven’t attended to some  of the gaps in the regulatory arrangements,” he said.
Removing the crutches

The G20 leaders have won plaudits for the estimated $5  trillion they have collectively injected into their economies  to revive growth. Cross-border cooperation among central banks  helped to ease a credit crunch, as did emergency loans and  guarantees put in place to restore the flow of credit to  consumers and businesses.

But big questions remain about how healthy the global  economy will look once those crutches are removed, which the  G20 acknowledged when it committed to keeping supports in place  until sustainable recovery is assured.

Kashyap was most concerned that the United States had yet  to come up with a way of safely shutting down large financial  firms in danger of a disorderly collapse so that they don’t  trigger a global panic as did the failure of investment bank  Lehman Brothers in September 2008.

“If some other large institution got into trouble the same  way, they’d have no better set of options than they had a year  ago, and I think that’s pathetic,” Kashyap said.

The US Federal Reserve and Treasury Department have been  pushing Congress to pass legislation giving regulators  authority to wind down firms in trouble, much like the Federal  Deposit Insurance Corp — or FDIC — can shut failing banks.

US Representative Barney Frank insisted this week that  Congress would indeed establish “death panels” for firms deemed  too big to fail so that taxpayers won’t be on the hook.

The G20 set a 2010 deadline for big firms to put in place  contingency and resolution plans, but because these companies  operate in many countries with differing bankruptcy laws,  finance experts think international rules are necessary.

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