Around the world, the reaction of investment markets to the G20 summit has been emphatically positive. No, we actually don't know that. Investment markets have done emphatically well at the same time as the G20 summit was taking place in London. We can't be sure of the exact quantum of cause and effect, but it seems churlish to deny the 20 wise men and women their contribution to the generally cheerful mood that has gripped the world.
While the 20 are professional optimists, so to speak, professional pessimists too are conceding some ground. Even the New York University economist Nouriel Roubini, who famously predicted the economic meltdown in some detail, has been reported widely as having turned an optimist recently. Actually, all Roubini has said that he now thinks that the chances of a full-fledged depression are somewhat less than that of a mere deep and long recession. Coming from Dr. Doom, I guess that could pass for optimism.
Anyhow, there's no denying that the gloom and doom is weighing lighter upon the world's shoulder than at any time since the worst of crisis broke. The question is whether this has any reality or if this is a temporary smoke and mirrors public relations effect that will vanish as suddenly as earlier ones have. To answer this question, one must examine whether the G20's received wisdom about the root cause of the crisis sounds appealing. The headline actions of the G20 have been to make about a trillion dollars available to the IMF to avoid national bankruptcies around the world, and a promise to create a new global regime of tighter financial regulation.
The promise (or threat, according to your perspective) of tighter regulation has three main components. These are greater regulation of under-unregulated activities like hedge funds and exotic instruments, tighter monitoring of credit-rating agencies and a crackdown on off-shore tax havens. This is a good start. There's no doubt that unregulated markets and dysfunctional and possibly corrupt credit rating practices played a central role in creating the crisis, although the specific role of tax-havens in this particular crisis is probably not central. There is already much regulatory tightening globally, but those who need to be regulated are politically powerful almost everywhere and I have my doubts about the actual ability of governments around the world to deliver a co-ordinated regulatory framework.
But is this all there is to tackling the economic crisis? A trillion bucks for those teetering on the brink and tighter regulations for those who pushed them there? This implies that a lax regulatory framework is the root cause of this crisis. But perhaps there's something more to it. Dr. Nouriel 'Doom' Roubini, for example, has always held the gigantic quantum of easy money that was being poured into the global economy as the root cause of the crisis. The problem was is there was all this money that had to be deployed somewhere. Our crisis is caused by this huge quantum of liquidity that found its way into every nook and corner of the world economy. There was a party of debt that was being celebrated everywhere from the sub-prime homes of America to the sands of Dubai to almost any Indian business you care to examine. This is just the inevitable hangover. From this perspective, almost everything that is being done to solve the problems will eventually boil down to an attempt to reinflate the same bubble again.
Still, I guess one should be thankful that the G20 has provided some cheer. Since panic is one of the components of the current crisis, anything that raises hope should be part of the solution.
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