The leaders of the Group of 20 (G-20) held an emergency meeting over the weekend to review the causes of the global financial crisis and prescribe policies to prevent future ones. The meeting was initially hailed by some as a Bretton Woods II,* but its results were less about radical systematic reform than enhancing existing standards.
The meeting produced an action plan outlining short- and medium-term measures based on an agreed-upon set of "common principles for reform of financial markets." Most of the measures comprise some form of additional regulation or oversight—no surprise given the meeting's agenda—and are ambitious in their intent, scope, and timeline (they have a deadline of March 30, 2009 for implementation).
These same ambitions may stand in the way of actual implementation and effectiveness. The underlying belief behind the proposals is that through regulation and oversight, governing bodies will be able to identify developing financial problems and stop them from forming. Yet, this hasn't been true in the past, nor will this be true in the future—financial systems are too complex and fast-moving. In addition, many of the measures call for global standards to traverse ideological, philosophical, and logistical differences—not an easy feat. The G-20 countries have disagreed in the past on how far regulation should reach, and it would be too optimistic to think those ingrained ideals would change now.
The greatest irony of this meeting is that many of the participating countries are on the one hand pleading for increased regulation to prevent financial institutions from engaging in risky lending practices while on the other haranguing those same financial firms to immediately increase lending to stave off a worse recession.
Still, there are positives. The G-20 countries formally recognized reforms could only succeed if grounded in a commitment to free market principles and pledged a 12-month commitment against protectionist policies—an important promise from the world's biggest industrial and emerging economies. Measures calling for increased transparency and disclosure in the financial markets could also have a positive impact by helping institutions and investors make more informed decisions.
The G-20 countries are meeting again before April 30, 2009 to evaluate the implementation of these measures. By then, we'll have a better sense of how these proposals will be put into practice. For the most part, the proposed measures are worded vaguely with few specifics—and countries will likely interpret the words as they see fit. We wouldn't be too surprised to see some things get lost in translation.
* The original Bretton Woods conference in 1944 established a new international monetary system and financial order among industrial nations in the aftermath of World War II. For more, see http://en.wikipedia.org/wiki/Bretton_Woods_system
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.