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G-20 Preview: Prisoner’s Dilemma Revisited

Posted by Larry Doyle on September 21, 2009 9:12 AM |

Should we expect any surprises emanating from the G-20 conference at the end of this week in Pittsburgh? Don’t count on it. The fact of the matter is the bulk of the work at these conferences is done beforehand, and the conference itself is more pomp and photo ops than anything else.

Getting the G-7 to agree on a wide array of economic issues is tough enough. To think the G-20 will not only fully agree on the importance of the underlying issues facing our global economy BUT then also implement the necessary changes is not likely. If this group of nations had the necessary degree of conviction and cooperation, perhaps we would not find ourselves in the current economic morass.

What are the main topics and initiatives the G-20 is already working on pre-conference? The Wall Street Journal provides a preview in writing, Nations Ready Big Changes to Global Economic Policy. Allow me to highlight and comment on the major initiatives.

1. Need for increased savings rate in United States.
This is occurring, but can and will it be sustained past the point of paying down our short term debt? Can the ‘wizards in Washington’ ever address our long term federal deficit? I am not optimistic. The inability to address our long term fiscal deficit is a pox on both sides of the aisle. In an attempt to make progress on it . . . hello higher taxes!!

2. Need for increased consumption in China.
We have not yet seen a real inclination by the Chinese to consume more. As many low income wage earners in China fight for a better life, I think this hope is a long range target rather than a near term reality.

3. Need for Europeans to invest more in their business infrastructure.
I am less optimistic on this than I am on the Chinese inititiative. Why These investment dollars would likely come at the expense of supporting social programs which are the very fabric of the European culture.

4. Europeans are pushing for substantive reforms on banker compensation.
The Wall Street lobby is already hard at work to maintain control of this issue. I have very mixed feelings on this topic. Ultimately, I believe the misalignment of risk and reward on Wall Street is nothing more than a failure of corporate governance. Until the boards of our largest banks embrace the need to change that fabric, I think compensation reform will be shallow.

5. The U.S. regulators are pushing for major banks to hold more capital to protect against systemic risk.
This is all well and good, but if the increased capital is not also correlated with the use of the capital then the systemic risk will not be alleviated. Our friends in Washington should invite Paul Volcker into this discussion and embrace his ideas to have Wall Street exit its hedge fund-like activities inside our major banks.

6. China continues to pursue an increased influence by developing nations within the IMF.
You can feel the impact of this shift already with the greenback declining in value.

MAJOR CHALLENGE: Make no mistake, our international brethren strongly believe the core of our current economic crisis resides here in the United States. That core encompasses the regulatory failings on Wall Street. Without real transparency on that front, Wall Street will continue to work diligently to maintain its ‘business as usual’ mantra which it believes is in its own self-interest.

Speaking of self-interest, that is the base principle in which economic institutions tend to act. With no real enforcement to change behaviors (and the G-20 has never had real teeth on the enforcement front), the economic leaders of the countries will ‘smile for the camera’ but then return home to continue pursuing their self-interests and remain prisoners to each other. That pursuit of self-interest is the very essence of “The Prisoner’s Dilemma” which I highlighted last January.


Related Sense on Cents Commentary:
   Increasing Chinese Protectionsim: A Real ‘Prisoner’s Dilemma’ (June 23, 2009)

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