Gordon Brown will fly to Washington next week for his first meeting with Barack Obama since he became President. He will discuss an economic crisis whose seriousness was underlined yesterday when the renowned economic guru George Soros said in a speech that the world financial system has “effectively disintegrated”, with turbulence more severe than during the Great Depression.
Mr Brown’s visit, on 3 March, will prepare the ground for April’s G20 meeting in London, which is intended to draw up concrete measures for international economic recovery. Mr Soros, whose words and actions have moved entire markets in the past, told attendees at a conference dinner at Columbia University: “We witnessed the collapse of the financial system. It was placed on life support, and it’s still on life support.”
His words are stronger than his previous statements: at Davos a month ago, he said the financial system was merely “dysfunctional”. He now compares the current situation to the demise of the Soviet Union and added: “There’s no sign that we are anywhere near a bottom.” Another speaker, Paul Volcker, former chairman of the Fed and now adviser to President Obama, said that, while he felt capitalism would survive, “I’m not so sure about financial capitalism”.
The announcement by Washington of the visit brings to an end speculation over whether Mr Brown would be beaten by the French President, Nicolas Sarkozy, or the German Chancellor, Angela Merkel, for an audience with the world’s most popular politician. Mr Brown will meet Chancellor Merkel in Berlin today as he continues with preparations for April’s G20 summit in London.
Momentum is now building for more than hand-wringing and fine words to come out of the London summit. President Sarkozy said yesterday: “I will not associate myself with a position that does not give an ambitious response to this deep crisis.” Italy’s Prime Minister, Silvio Berlusconi, has already called for the summit to make “strong and concrete” proposals to fight the financial crisis.
Guiding Mr Brown and, he hopes, the other leaders at the gathering will be the 74-page document he unveiled last week called The Road to the London Summit: The Plan for Recovery. It calls for eight “concrete commitments” to be agreed at the meeting. They include a review of measures so far taken to stimulate demand; an increase in the IMF’s resources to make more loans; immediate action to ensure banks are adequately capitalised; an international renunciation of protectionism; reform of financial regulation; and reform of international financial institutions.
In his New York speech, Mr Volcker delivered judgements unimaginable a few months ago. He began by saying the financial system we have known would never return. “Too many weaknesses and flaws have been exposed,” he said. He added that banks had gone from a system based on relationships with customers to “a very impersonal kind of market where everything was a deal”, often at arm’s length, with loans packaged, repackaged, and resold, often several times a day.
Mr Volcker insisted that banks should be barred from sponsoring hedge and equity funds, and engaging in any high-risk activity, and incentive schemes should be completely overhauled. He said he found no evidence that the huge sums made by bankers “penetrated down to the rdinary person”.
A more distributive US economy has had to await the advent of Barack Obama, and yesterday the President said Americans will start to reap the benefits of a $787bn stimulus package in a matter of weeks. “Never before in our history has a tax cut taken effect faster or gone to so many hardworking Americans,” he said. He added that in six weeks a typical family will start taking home at least $65 (£45) more every month, part of plans that will, he insists, benefit 95 per cent of working families.
And yesterday word began to leak out of the budget that President Obama is finalising. He wants to cut the federal deficit in half by the end of his first term, mostly by scaling back Iraq war spending, raising taxes on the wealthiest Americans and streamlining government. Obama's proposal for the 2010 fiscal year that begins on 1 October projects that the $1.3 trillion deficit he inherited will be halved to $533 bn by 2013. He has pledged to wind down the Iraq war by withdrawing most combat troops within 16 months of taking office. He also has said he would letting the Bush tax cuts expire for people making more than $250,000 a year, effectively raising taxes on those people.