The Global Economic Summit G20 in Washington DC November 15th 2008

It is a total sham to hold such a meeting in the midst of this economic crisis, which has been created primarily by the US Federal Reserve not regulating the totally irresponsible lending practices of the quasi mortgage lenders like Fannie Mae and Fredddie Mac and Banks under its purview. It is akin to holding a meeting of the foxes in the hen house!

All regulatory bodies must share the blame, as this problem was obvious even to the amateur. It is interesting to note that there has not been any mention of the culpability of the accounting firms, who I believe must share in the blame, but if it is highlighted, they would all be out of business and so they are keeping mum about it lest blame is apportioned to them.

There is no point partaking, as we all agree, in the blame game, and we should go towards reducing the impact of this recession and to the best of our abilities reduce the likelihood of it occurring at this level of severity.

The reaction of the stock market is just a reflection of confidence and not the problem itself, which resulted in lending drying up, businesses unable to borrow, and so on. It is so apparent that confidence is fickle and any Bank can go under if there is a run on the bank. The IMF was set up to help short term confidence issues of countries, and similarly each country must set up a contingency fund for the very same thing happening to their banks, but with a tough regulatory framework within which to operate.

It is easy, as we have seen for these rules to be flouted as incomprehensive mortgage instruments are invented daily, and few understood what they meant, in order to be able to opine on their value and recoverability. More novel ways will be found in the future to do the same thing, and until the authorities are able to get wind of them when they are structured rather than wait for a problem to occur, we will have this crisis again.

The severity of the crisis depends on the confidence of the public, which in turn depends on the way it is handled by the respective governments, and I say it again, that the stock market is just a barometer of this and not the cause. This meeting does not foretell of a combined international effort to combat bad practices of private institutions by ensuring strict adherence. The internationalization of the larger Financial Institutions including Insurance companies means that common rules must cross frontiers, as otherwise some of the problems can flow out of the borders of one into the other. The problem is that exchange rate fluctuations may also have to be managed, as even these result in banks going bust. How does one effectively control the prima donnas in banks that are always taking risks on behalf of the banks and making bets that could bring the bank crashing. There is a limit to the amount of regulation that can prevent rash action that if proved correct can make a huge profit for the bank and hence a huge bonus to the departmental head. Often the person does not lose his job if the bank suffers a loss.

The most important point to note is that with the advent of the internet and cross border banking made easy at the click of a button on a laptop, people are able to move funds daily with very low transactions cost. So a global approach is needed as countries and currencies can be affected just on whims and rumors that are baseless. Greed and profit are part and parcel of the western world, but now even more so in China, India and Brazil, therefore concerted action is required when there are signs of trouble, rather than waiting for the problem to balloon outside anyone’s control.

The level of uncertainty as well as the reward for placing the correct bet is so great that despite the best will in the world small fluctuations in exchange rates can result in massive losses or gains, that may force companies and banks to go bust, and no amount of regulation that kicks in later will help them. So regulation has to be real time, and hourly, with computer programs highlighting the contingent liabilities on an hourly basis. The regulators also need to be aware of this at this speed as well, but as secrecy is also part of the ability to profit, it will be difficult to agree internationally on how such immediate issues can be identified and tackled.

I am not confident that the real issues will be tackled. It will be an attempt at a smokescreen to reduce uncertainty, and bring back the confidence that has disappeared. It may have a short term benefit, but the structural international issues will not be even addressed, unless an institution is set up to oversee and report on this problem with a timeline on recommendations that are binding on countries. Few countries will allow international regulators. So it is unlikely that the real issues will be solved. The free market will be free to carry on in the same vein and then again go for government bailouts when things get difficult and the troublemakers get off scot-free yet again while the innocent will suffer the pain and consequences yet again. It is sadly the way capitalism works, but is a better alternative to socialism, where the government interferes in one’s life on a daily basis akin to a nanny state.