Outlook: Few events are guaranteed to produce quite so much hot air as international summits of global political leaders. Common ground is so difficult to find that rarely do their communiqués add up to anything more than a string of meaningless platitudes.
The last G20 in November threatened to break the mould, with an unprecedented and apparently concrete commitment not to introduce any more protectionist measures for at least12 months. Regrettably, it turned out not to be worth the paper it was written on. Most participants returned to their constituencies and immediately put up tariffs.
Is there any reason to think next month's meeting of the G20 in London will be any better? Gordon Brown, the British Prime Minister, has a lot riding on it politically. What little chance he's got of re-election next year depends crucially on being seen to come up with credible solutions to the economic and financial crisis.
The London G20 is critical to this process, for it presents another opportunity to claim personal credit for having "saved the world". It's fair to say early indications are that he's not doing that badly. Britain has been first out of the hatches with a comprehensive plan for regulatory reform – the Turner review – and Mr Brown seems to be broadly winning the argument on the need for unnatural levels of fiscal and monetary action.
Germany pretends to stick to the disciplines of sound money and tut-tuts about deficit spending, but in point of fact the size of its own fiscal stimulus relative to GDP isn't that much different from the US. Similarly on quantitative easing, where others are now rushing to follow Britain's lead with reasonably transparent schemes for buying in government bonds, mortgage-backed securities, commercial paper and various forms of corporate debt.
One half-suspects the only reason the European Central Bank isn't quite so keen as others is that there are significant practical difficulties for the ECB in deciding which government bonds to buy among the single-currency member states . The ECB may also struggle to cover losses on these purchases without the treasury guarantee that non-euro nations have been able to give their central banks. Certainly it is going to be more of a challenge for the ECB to apply QE than others. Fortunately, it still has scope to ease rates a bit more before being forced to go the QE route.
In any case, there is already a high degree of consensus among the G20 on the fiscal and monetary response, with most nations already getting on with it on an individual basis. It shouldn't be hard for them to agree to do collectively what they are already doing individually.
The need to agree on regulatory reform is less urgent. The financial system has been so chastened by the experience of the last two years that right now you could remove all banking supervision entirely and still bankers would be well behaved for years to come. Yet there is still a powerful political imperative for action.
The mob won't be satisfied until bankers are imprisoned, both physically and metaphorically. Tying them up in regulatory knots, controlling their pay and generally putting these one-time masters of the universe in their place is all part of a necessary social and economic catharsis.
Lord Turner has been careful to make his "Regulatory Response to the Global Banking Crisis" reflect the emerging international consensus on regulatory reform. By so doing, he's ensured the review stands a reasonable chance of being adopted as a blueprint for the G20.
As a sop to the European Union, he's even taken on board the idea of a new, overarching, European financial regulator with legal powers of enforcement to set standards and ensure cooperation between national regulators. Even a few months back, this was not something he appeared in favour of, though he has always accepted the desirability of a treaty-based institution similar to the World Trade Organisation to set international standards.
Is it credible for the UK to be lecturing other nations on regulatory reform? Britain's system of "light- touch" City regulation was a major part of the problem. Unbridled Anglo-Saxon capital markets have been completely discredited by the events of the last two years, and it is perhaps for others, particularly the Europeans, to claim the high ground on regulatory reform. Lord Turner neatly sidesteps all such claims.
Light-touch regulation, he points out, was based on an intellectual misconception that free markets are always right, rational and self-correcting, and that they impose disciplines that prevent excessive risk- taking. This turned out to be an awfully long way from the truth, but it was very much part of the political and economic orthodoxy of the day.
A new book, Chasing Alpha, by the former investment banker-turned- City-historian Philip Augur brilliantly charts the evolution of this approach to City regulation. The book's subtitle – How Reckless Growth and Unchecked Ambition Ruined the City's Golden Decade – tells only the half of it. In fact, all of these things were actively encouraged by the Government of the day.
In his Mansion House speech in the summer of 2006, Gordon Brown, then still Chancellor of the Exchequer, had this to say about the triumphs of New Labour's approach to City regulation: " The message London's success sends out to the whole British economy is that we will succeed if like London we think globally. Move forward if we are not closed but open to competition and new ideas. Progress if we invest in and nurture the skills of the future. Advance with light-touch regulation, a competitive tax environment and flexibility."
At around the same time, his right-hand man, Ed Balls, boasted to a City audience in even more embarrassing terms about the triumphs of the light-touch approach, but I won't intrude further on private grief by repeating his remarks. Oh all right then, here they are. "The Government's intent in this area is specific and clear – to safeguard a light-touch and proportionate regulatory regime that has made London a magnet for international business."
The tragedy is that these views still contain some validity, but you won't get much air-time for this type of free-market thinking almost anywhere these days, least of all the G20. For better or worse, light-touch is to be replaced by heavy-handed.
Lord Turner's review is aimed at reform of British financial regulation, but as I say, he's careful to tailor it to an emerging international consensus.
If it were imposed unilaterally on the City, without application elsewhere, the Square Mile, already devastated enough by the implosion in financial markets, would be wiped off the face of the map. Finance would simply up sticks and move somewhere else. To work in a globalised world, the regulatory regime has to be broadly the same almost everywhere. Regulatory arbitrage has to be abolished alongside light-touch.
Just as a bust inevitably follows a boom, it is part of the cyclical order of things that a period of unfettered free markets will be countered by an equal and opposite age of government intervention and control. It's the way of the world. When markets fail, the natural response is to attempt to control them more. Little good ever comes out of these regulatory backlashes. The danger is that they merely succeed in making a bad situation even worse as political agendas come to substitute for business decision-making and commercial judgement.
Bankers don't have a leg to stand on any longer, but does anyone really think that politicians and regulators are any more capable than markets of deciding what's risky and what isn't, or of creating wealth and economic progress? All the evidence of history suggests that they are not. To the contrary, government failure tends to be far more devastating in its consequences than market failure.
The focus of the G20 is rightly to try and ease the pain of the downturn and buttress the system against future crises. These are noble ambitions and I certainly don't want to kick against much of what the Turner review suggests. It is perfectly reasonable to want to make banking safer for depositors and credit less cyclical in its economic consequences. By the same token, it must be right to apply Keynesian solutions to the economic downturn, even though by attempting to lessen the economic pain we are perhaps condemning ourselves to years of high taxation and limited growth.
The trouble is that today's market failure is being used as the excuse for government intrusion and action in a wide range of areas, many of which have nothing to do with the immediate crisis. The liberalisation agenda plainly went too far, but the pendulum is now swinging with frightening speed back in the opposite direction.
Big government is on the march once more. Is this really a desirable outcome? The evidence is that busts and all, markets deliver growth and progress. Governments, by contrast, stultify and paralyse. We must be careful that the cure doesn't turn out to be worse than the disease.Reuse content