My Wish List - Summit Of The Americas

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If you've followed this blog, you may know I rarely mention Jamaica. That's deliberate. So I'm not commenting on the budget or the Cabinet reshuffle.

However, I will comment on something that Jamaica is involved in - and that is a grouping of countries called the Americas. There are many commonalities - geography is an obvious one, dependence on tourism and remittances are others, for example. But there are many differences - language is one, cultures are another, for example.

There's a big meeting coming up next week - April 17-19 2009 - called the Summit of the Americas. There's a theme...but here's what I think they should get done if we are to accelerate this global recovery.

First, please do not spend the time blaming the US for this mess. They know, we know, the world knows..... Let's focus on solutions. We have no time to waste.

Second, please do not spend the time working on things that are really unlikely to happen. For example, lobbying for offshore banking after the G20 communique and declarations is really not the most productive use of time. Save that for another forum. Petition the G20 if you like. Take it up at the next IFI meeting. Anything, but right now at this time, this one is unlikely to go very far. France and Germany threatened no deal with the G20 over this issue (it was one of them).

Third, please focus on a few tangible quick wins. Yes, you can do like the G20 and pledge the world of cooperation, but come out with actual measures - and money and an implementation timetable - for real things to make real differences in the region

Fourth, here are three suggestions for tangible things that I think are win-win for everyone. And here's the best part, President Obama already said he's supportive of them. See his campaign document: A New Partnership For The Americas.

1) Find some way to get the remittance flows to return to at least the level it was before the collapse in September 2008 - even if it is a temporary measure. My two cents? To ease the tensions with Mexico, the US would benefit greatly from the stability that the remittance flows facilitate. This is a real problem with a practical solution. Come to the table with some measures to encourage remittance flows. For example, explore - just explore - facilitating the ease of transfer of funds between countries. And for example, facilitate and allow job programs that allow remittances to flow. Job creation for all people will generate much stability in the region and significantly reduce what the IFIs need to provide on a recurring basis. Translation - that $1T pledged by the G20 can stretch further.

Want to know what Obama's document said when he was Candidate Obama:

"Tap the Power of Remittances: Obama will work with international organizations, particularly the Inter- American Development Bank, to leverage the financial resources immigrants send to native countries. At more than $50 billion a year, remittances dwarf U.S. foreign assistance. Obama will work to foster a new spirit of partnership and cooperation to maximize the impact of those remittances on social and economic development across the hemisphere." See that "tap the power", "maximize the impact of those remittances on social and economic development across the hemisphere"

2) Pull out all the stops for micro and small business development - special fund or funds, special loan programs, whatever it takes - all the bells and whistles. Job creation in their own counties solves a myriad of problems - poverty alleviation, social stability, crime reduction, growth, wealth creation so people can buy imports, etc. etc. etc. This is a win-win for everyone and with the exchange rates, a little hard currency from the larger developed members goes a long way.

Want to know what Obama's document said when he was candidate Obama:

"A Fund for Small and Medium Enterprises (SMEs): It is neither sustainable nor appropriate for donor countries to focus solely on reducing poverty in the developing world. The challenge is to build the capacity of communities and countries in the developing world to generate wealth on their own and in a way that is sustainable over time. Building on the growing evidence that microfinance is an effective tool to facilitate this growth, an Obama administration will provide initial capital for an SME Fund. Administered through the Overseas Private Investment Corporation, an independent U.S. government agency, the government will provide capital matched by a larger portion from the private sector. The SME Fund will be designed to provide seed capital and technical assistance to catalyze the establishment of job-creating small and medium enterprises, and to build the capacity of entrepreneurs to translate their ideas into viable businesses, including through the creation of regional “SME Universities” supported by America’s business schools." See that..." A Fund for Small and Medium Enterprises", "Building on the growing evidence that microfinance is an effective tool to facilitate this growth..", "seed capital"..... etc etc.

3) Use the brainpower in this region to pipe in and push for IMF reform. I doubt any other region has the depth of experience with IMF programs and its impact like the Americas. Use that experience to guide what "not to do". The IMF just got all the money from the G20 to try to fix the world. Everyone knows the IMF needs reform - including the IMF. Everyone knows the IMF needs to reform its "terms and conditions". In order for the IMF money to really work to fix this global economic mess we are in, the region needs to take an interest and active role in the reform.

Want to know what Obama's document said as Candidate Obama:

"Lead Efforts to Reform the IMF and the World Bank: The International Monetary Fund (IMF) and the World Bank have contributed in important ways to an era of tremendous openness and global growth since 1945, but both institutions face crises of governance and are in need of modernization and reform. Its limits were apparent during Argentina’s economic struggles in the late 1990s and early part of this decade. As president, Barack Obama will lead an effort in the G-8 to achieve a new consensus on the missions of the IMF and the World Bank, while at the same time securing necessary changes in how both institutions are governed
to reflect the increasing influence of middle-income countries." See that..."both institutions face crisis of governance and are in need of modernization of reform" etc. etc.

Let me be clear - if President Obama and the Americas are willing to make sweeping changes on Cuba, support for education, and cooperation for crime and security, and debt relief and energy measures etc. etc. - all those things in that document - I would be the happiest person on earth. But I live in the real world, and we have been talking about some of these things for a long time. Most of these are difficult to get agreement on; and even more difficult to get a realistic implementable plan for.

FURTHER, if we do not get an urgent recovery in remittances, get some serious urgent dedicated and sustainable funding and focus on micro-enterprises and small businesses, and urgently reform the IFIs to ensure that we can access the funds in ways that do not cause severe social dislocation, then frankly, none of these other things are likely to happen in an sustainable manner.

So, I am going to lower my own expectations and limit my wish list to what I have listed above.

I personally would be satisfied if the members could come out of this Summit with at least tangible, realistic, practical and implementable programs for whatever the leaders decide. And seriously, we need it like....yesterday!

So Now What G20?

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Let's give credit where credit is due. The G20 met and agreed. The alternative - not meeting, or meeting and not agreeing - is too horrible to contemplate. So let's give thanks for what we have.

Surprisingly, they have said a lot. Really, I've had some experience with communiques and they are usually very vague because its the only way to get all the countries to agree. And how much is a lot? Well, 1 statement and 2 appendices with details. Shocker! Here are the links and they are well worth reading. And if you have followed this for years like me, some of this stuff will make your eyes open very wide because I never thought I'd see this day. So:

• Leaders' statement

• Declaration on Strengthening The Financial System

• Declaration on Delivering Financial Resources Through The International Financial Institutions

All in all, a good start. Seriously. Lots of recognition of problems, lots of promises of things to be done, some specificity, commitments to fight poverty, create and save jobs etc. Sounds - I repeat, sounds - perfect. BUT, see that image of the standoff. Let's not think we have now magically gotten order from the disorder. Evidently they "know" and that's a lot. But the test is really the collective "will". Because nothing has actually happened yet other than the agreement. People have to do things now - things have to happen, money has to flow, rules have to be made and enforced. We needed the agreement ages ago; and now that we have it, we need the action eons before that. There is no time to waste!

What's the bottom line?

• The IMF gets a ton of money to try to save the world. Other institutions too but the IMF gets the bulk of it. Question though? Access, access, access? Terms and conditions? The terms and conditions contributed to this mess and can contribute to instability. The IMF is famous for "structural adjustment" which you might as well call "social pain". Social pain right now is NOT helpful. Unemployment is rising, incomes are falling and savings are lost. People do not need to be "adjusted" right about now. So this money can be really helpful, only if it can be accessed and it is made available in a way that helps.
  

• If the financial sector was a wild animal, the leaders want it tamed. So countries have "agreed" to lots of sweeping measures - oversight for credit ratings agencies (that alone can save the world if done properly), supervision for some - yes, unfortunately some - hedge funds, restrictions for tax havens, accounting reform, a body that warns us if this is going to happen again, measures for executive compensation.....read the separate declaration because it's pretty good "whats". You know where this can all fall down - HOW? Yes, how do you enforce these things? And yes, how do you prevent domestic legislation for overruling or ignoring this - please note the US Congress relaxed mark to market accounting the DAY these lovely agreements were released? And yes, how do you ensure that the intent of all these measures results in a functional financial system? Because frankly, there are easier ways - people may not like them but banking will work again. I have already noted a number of qualifying statements which are just big loopholes if you ask me. But as I said, getting 20 countries to agree does require some vagueness. Leaders should be reminded that whatever they say and agree to, the genius and will of the "engineers" must never be underestimated. They will engineer ways around whatever they do not want to do and they are not concerned with the matters that keep world leaders up at night like avoiding social unrest, preventing poverty etc. So, I take these documents as good intentions on the parts of leaders. And I wait in breathless anticipation for the details. And I hope that people are really realistic in making up those details, and that domestic legislatures are supportive of the intentions that their leaders have committed to. This is NOT a political football - the financial system must work, or we - the whole world - are in big trouble.
  

The documents are worth reading....but the action steps are really what I am waiting for. The proof of the pudding is in the eating. Nice looking pudding.....but we haven't tasted it yet. The G20 had a great talk...but now it's time to have an even better walk.

G20 Gets Ready To Deliberate Global Financial Sector Regulatory Reform

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Ok...how weird is it that there is a draft statement available before the leaders have met? From Reuters: Draft Communique for G20 Summit. Anyway, never mind. It's inadequate. So let's hope they go back to the drawing board. I'm not commenting on that tonight - I'm going to wait until they realize they must have a concrete job plan for their respective peoples.

Tonight, I'm commenting on financial regulation that's being considered. And specifically, I want to refer to this informative piece from Bloomberg: G-20 Targets Hedge Funds as Leaders Near Consensus

Now, all of this article is interesting....but let's look at some things in particular...

"“Having the U.S. and Chinese on board makes it a whole lot more likely” that an international framework will eventually emerge, says Harvard University’s Kenneth Rogoff, former chief economist of the International Monetary Fund.

Rogoff says that “it seems virtually certain that four to five years from now, the world will have either a global financial regulator or, more likely, a treaty on global financial regulation with a secretariat, akin to the World Trade Organization.” Still, he adds, “nothing is going to happen quickly.”"

See that? "treaty on global financial regulation..." That was on my wish list. See post: My Wish List - The New Global Financial Architecture. A single regulator is not realistic. A treaty is very realistic.

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"Geithner suggests empowering the Financial Stability Forum, a group of international market regulators, to “play a more effective role” alongside the IMF and the World Bank in promoting and monitoring new international regulations."

Great...except, guess who is in charge of the Financial Stability Forum now? A former Goldman Sachs exec. Anyone shocked?

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"The U.S., which has long expected other nations to follow its lead on regulations, may now have to yield to more cooperation, says former Federal Reserve Chairman Paul Volcker.

“The U.S. is no longer in a position to dictate that the world does it according to the way we’ve done it,” Volcker, head of Obama’s Economic Recovery Advisory Board, told a March 6 conference at New York University."

And here's why I think so highly of Volcker - he lives in the real world.

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"The call for greater regulation unites China, possessor of the most vibrant economy in the developing world, and the U.S., possessor of the world’s largest economy. China’s central bank governor, Zhou Xiaochuan, challenged the West to fix flaws in financial supervision on March 26, the same day U.S. Treasury Secretary Timothy Geithner outlined a broad initiative designed to do just that. "

"“China has to be listened to,” says Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “What they are trying to do is exert maximum influence on the design of the new global financial architecture.” "

Aha....here's the reality. I think I've said several times to watch China....

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"A new collaborative strategy was evident in a working paper released on March 27 by the Canadian government on behalf of the G-20, which comprises 19 developed and emerging economies plus the European Union and represents 85 percent of the world economy. "

Stop the presses. Does this mean that Canada is drafting this document! All my wishes are coming true. I asked for Canada to take a leadership role in this from the very beginning.

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Pretty interesting developments...can't wait to see what they end up with.

My Wish List - The New Global Financial Architecture

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If you have been following this blog, you would know I have a major bee in my bonnet.

If I could write every day about the need for a new global financial architecture, I would.

If I could spend all day designing what I have termed not just a new global financial architecture, but a stronger, more stable, more equitable and more sustainable global financial and economic system, I would.


But since I can't here's my very quick wish list, in no particular order of significance because they all are to me. By the way, this list is not meant to be comprehensive. Let's think of this as a good start.

1. In my ideal world, there is no abuse of power. Not by anyone. That's right.

• In my ideal world: Financial institutions do not abuse their power over anyone. Why? People depend on their banks - they trust them. Rather, let me correct myself. They used to trust them; and they want to trust them. Leading people astray into undertaking obligations they cannot manage, or selling them investments they do not understand is not only immoral, it is an abuse of power. What is that power? It is the power of information.

• In my ideal world: Regulators do not abuse their power, or make it up when they have none. Why? Regulators are to ensure the efficient and fair functioning of the markets. Because the cornerstone of functional financial markets is that people have confidence in the regulators even if they cannot have confidence in the institutions. People need to believe that there is someone or something or some institution charged to make sure their money and their investments are as safe as possible. So regulators have a responsibility to act predictably, transparently, within the confines of the law and regulations, according to the law and regulations and only constitutionally with due respect to people's rights.

• In my ideal world: Ratings agencies do not abuse their power. Why? Rating agencies are crucial for functional markets. As we see, the whole world can spin on their advice. So that advice MUST be based on reasoned technical assessments in a transparent process that is supervised. They are to be supervised by an independent body comprised of representatives of different countries from the developed and the developing world. Respectfully, that institution cannot be the IMF or any of the other multilaterals. Independent ratings agencies must be independent from the financial sectors and companies they rate, independent from the IFIs and independent from the influence of any one individual or country. They must be independent of their perception of their own self importance.
  

2. In my ideal world, there is mandatory financial education for everyone - in every country. Why is this important? Because people must understand 1) how to manage their own money 2) what affects their money and the value of their investments 3) how to question all the financial advice they get. In my ideal world, financial education would start at kindergarten and be mandatory at every level through to the end of college. I am totally serious. Think about it. You need money all though your life, and you need to be able to manage your money all through life. So why don't you have access to financial education the same way you learn to read, or do arithmetic, or learn spelling and grammar?

3. In my ideal world, financial education must be funded by the financial sector, but not conducted by the financial sector. That's right. I'm probably alone here but I think that the financial institutions should fund an independent foundation that finances the school education project in 2. above as well as public education initiatives through the media. I completely support their right to makes lots of money. But to whom much is given much is expected. So, the more exotic you get with the financial engineering, the more money you should be required to provide to the foundation. You do plain vanilla banking in a conservative manner - then you get to pay less. This fund should be an international fund under the auspices of the United Nations. There are loads of ways to determine fair allocation - I could write a whole paper on how the fund should be financed and how it should function to make it fair for all people in all countries. Talk about a dream job! By the way, this kind of remedy is not unprecedented. Back in the early 2000s, the SEC made Wall Street pay for financial education for investors after they - Wall Street - made another mess, albeit minor compared to this. Check the history.

4. In my ideal world, the free for all is over. There are to be product limits, effective regulation, transparency, supervision and audit. It is beyond my comprehension that any type of financial product could be sold in such sufficient quantities that the market for any one type of financial product could exceed the GDP of the entire world. Really, did anyone think this was sustainable? Seriously, Credit Default Swaps - one type of Credit Default Obligations - exceed the GDP of the whole world. Insane. No more of that. Traders et. al. have all admitted that no one knows who even owns what. Are they kidding? No more of that. We need clearing houses, proper records, proper accounting, proper auditing and STRONG incentives to remain compliant. Yes, I did write incentives. Why? We've tried sanctions - people either don't care, or they are just not working or strong enough. People need to understand that the world is interconnected and it is in their "enlightened self-interest" for their own survival to act responsibly and build a sustainable system. By the way, everybody - yes, absolutely everybody - who takes or trades or engages in a transaction with even one cent of someone else's money gets regulated. Different levels of regulation for different players, I agree. But as long as you want to participate in the financial sector, you must agree to have a second pair of eyes - regulators - have a look at what you are doing. No ifs ands or buts. And no, I do not support overregulation. And yes, I made the abuse of power - by regulators - a big no-no. But there is no way I can support people doing whatever they want with other people's money. No more of that.

5. In my ideal world, the world's best universities lead the actual design of this stronger, more stable, more equitable and more sustainable global financial and economic system. Hey, this is just my wish list. Universities have studied this and are studying this. There are tons of experts. We need a year of structured seminars with working groups and working papers . THIS is something the IMF can host - because it has money. Bring in the practitioners, but don't give it to them to design. We are well overdue a balance between the public interest and the private interest. We are well overdue a balance between the bankers and the non-bankers. And we are well overdue a balance between the general public and all the various players in the financial sector - including the institutions, regulators and the rating agencies.

6. In my ideal world, international cooperation is effected by treaty with domestic legislation enactment. I hear and support the G20 in the very good and noble intention to have greater clarity and yes, control over what happens in the financial cyberspace. But realistically, one body to regulate everyone is just unlikely to happen. The reasons for that is really worthy of a book. Volume I would have to cover politics and political history just for context. However, it is possible to have international treaties with domestic legislation for enactment - you know, everyone agrees it is in their mutual interest to play by a certain set of minimum rules (to be decided), and that the local domestic regulators would enforce same, and that these local domestic regulators would meet frequently and talk frequently. This route is more possible than a super regulator for everybody. Further, having the IMF as that super regulator would require MAJOR reform of the IMF, and even the IMF has admitted that.

7. In my ideal world, we have a "grownup" - a super stablizer body comprised of membership from the developed and the developing world. How do I explain this? We cannot go through this again. We need some "body" whose job it is to keep an eye on everyone else. Not a regulator, but some kind of independent watchdog group. Maybe the media can form a partnership with some prominent NGOs. Maybe we should start a new NGO. Whatever or whoever, but here's what this body must do:

• Some "body" to make sure all the powerful people and parties do not abuse their power - and expose them if they do
  
• Some "body"to make sure mandatory financial education is taking place, and if it is not, then expose that
  
• Some "body" to make sure the foundation is funded and is funding what it is intended to fund, and expose the financial sector if it does not make it's donations, and expose the foundation if it is not doing what it should
  
• Some "body" to make sure the free for all is over, and expose anyone getting back into the reckless behavior with no limits, no or limited audits, no or limited regulation, no or limited transparency, no or limited supervision
• Some "body" to make sure the universities lead the design of this stronger, more stable, more equitable and more sustainable global financial and economic system, and expose them if they get off track
• Some "body" to make sure domestic regulators are keeping their commitments with regard to the treaties, and expose them if they don't
  

If it were up to me, this is what I would do.