Where the finance ministers can fix it

HAVE THE Group of Seven done enough? That is the immediate question that the financial markets will answer in their inimitable way this week. But there is another and ultimately more important question. Are they heading in the right direction anyway?

Robert Rubin, the US Treasury Secretary, described the meeting of the G7 finance ministers as "energised" or "energetic" half a dozen times. I'm not sure that the world really needs energetic finance ministers and central bankers. It needs calm and competent ones.

To say this is not to be dismissive of Mr Rubin, the G7's most important player, or Gordon Brown, who as UK Chancellor is currently the G7 chairman. Both are playing a weak hand with some style. Both sought to portray the G7 as active and in charge. But if you look at the ability to deliver there is a great vacuum.

Thus, the Japanese promise to rescue their banks and promote growth. Er, yes, without knowing how to do so? The US Administration promises to pay its dues at the IMF. Yes, but that is a Congress decision, not one for the Administration. Gordon Brown promises to promote sustainable growth in the UK. Yes, great idea, but already the Treasury predictions for growth next year look seriously over-optimistic.

So in this context, all these longer-term plans for changing the world money system are interesting but irrelevant. Everyone has to have A Plan for reforming some bit of the system. We have one; the Americans have one; the French have one; the Germans have one; the Japanese have one; the Canadians have one. The only G7 member that doesn't is Italy, and since the Banca d'Italia is in the central bankers' doghouse for investing in LTCM, the hedge fund that went belly up, maybe that is no bad thing.

So in the short-term there is likely to be disappointment. I suspect some of that will manifest itself in the markets this week, but unless there is blind panic, that short-term test is less important than the longer-term one.

Two things have happened in the last few days which have scared the more thoughtful participants at the G7 meeting. One is the clear sign that the Asian crisis is hitting the real economy in the US. Individual US companies had been warning of cuts in profits and in jobs for some months, but on Friday came figures showing a sharp fall in manufacturing jobs and only a small rise in employment overall. This was the first general evidence of a slowdown in the world's main engine of economic growth.

The other is the increasing evidence of a "credit crunch". This cute expression describes the situation where banks refuse to lend even to good risks because they have lost so much to bad ones. No-one can borrow, and economic activity declines as a result.

I spoke with one top banker who I have known for a long time. I have never seen him so worried. He felt that there had really been a change in the fragility of the world banking system. It wasn't just Asia. Russia had been the major shock, for here was a part-time member of the G7 (it became for a while the G8) defaulting on its debts. Add in the collapse of LTCM, plus the bizarre fact that even a G7 central bank had invested in it, and the sense of shock was all the greater.

As a result we had reached a new stage of the crisis, the outcome of which had become impossible to predict. One measure, however, of the financial world's desperate search for assets it could trust was the fall in bond yields of trusted governments, like the UK. People were terrified of everything else. What is the right policy response to all this? You have to segment the question, because there are lots of different problems, all of which require different reactions.

There are some obvious immediate problems that can be fixed and have to be fixed fast. Among these are shoring up the Japanese banking system. That is a mammoth job, with estimates of bad debts costing up to 30 per cent of Japan's GDP. If that is right, the Japanese are not going to experience much of an increase in their living standards for a generation, because they are going to have to pay somehow, either in higher taxation or in lost deposits, for their bankers' folly. You can see why this is such a divisive political issue in Japan now.

There are other "can be fixed" problems. Most of these are finding funds to tide over countries that have perfectly sound policies but are caught up in the general contagion. There is a long-term structural weakness here that will have to be tackled. But in the meantime we are just going to have to find ways of patching the existing system, grabbing each casualty and giving first aid as they come along.

Then there are some "can't be fixed" problems, like Russian debt. Here the bankers and other players have to accept that there are casualties in the fog of war, and that the important thing is not to allow the "can't be fixed" problems to undermine the "need to be fixed" ones.

Finally, there will be one or two "absolutely have to be fixed or the world economy is in very serious trouble" problems. We simply cannot see these coming now. We do know that these become more manageable under a climate of lower global interest rates. But cuts in rates only buy time - they are not a solution in themselves. And if they are not credible to the markets, they may fail in their intent. Meanwhile, the G7 finance ministers will have to lift their game.

Start your day with The Independent, sign up for daily news emails
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

The ZX Spectrum is back

The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

Even the screenwriter pours scorn on Grace of Monaco biopic

The critics had a field day after last year's premiere, but the savaging goes on
Menstrual Hygiene Day: The strange ideas people used to believe about periods

Menstrual Hygiene Day: The strange ideas people once had about periods

If one was missed, vomiting blood was seen as a viable alternative
The best work perks: From free travel cards to making dreams come true (really)

The quirks of work perks

From free travel cards to making dreams come true (really)
Is bridge the latest twee pastime to get hip?

Is bridge becoming hip?

The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
Long author-lists on research papers are threatening the academic work system

The rise of 'hyperauthorship'

Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

The rise of Lego Clubs

How toys are helping children struggling with social interaction to build better relationships
5 best running glasses

On your marks: 5 best running glasses

Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

'Ben Stokes gives everything – he’s rubbing off on us all'

Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

Please save my husband

As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada