PITTSBURGH — Leaders of the Group of 20 began gathering here to put the final touches on a pact to give long-term stability to the world economy, but they seem to be studiously avoiding the key to accomplishing that goal: regulation.
Motorcades of limousines, probably more of them than the city has ever seen at one time, ply the streets and protesters rappel down the bridges and hang above the Ohio River to raise awareness on climate change. The police line downtown streets in riot gear. And it leaves residents bemused by all the attention their city is getting.
But that is just the street theater of the event, the real work of the G20 — or at least the groundwork — will be done in a communique that probably has already been written.
Now, public agreement must be reached on how to stabilize the world economies to avoid another worldwide near-death financial experience like the one that happened a year ago.
The key to any kind of lasting correction is for the U.S. to get its regulatory house in order, an effort that has barely begun.
Much as with the recent talks in New York on curbing climate change, some G20 countries are likely to chide the U.S. for not making more progress on financial reform. Attention will be paid to how the U.S. plans to set effective rules of its own to keep markets steady beyond the current upturn and slake the appetite of investors for risk instead of solid profit. There is also the issue of controlling executive compensation and creating a consumer financial protection agency — both contentious issues in the U.S.
As other countries have reproached the U.S. for minimal proposals to address climate change issues, they are likely to expect some traction on the regulatory front, including reining in risk-taking by big financial institutions and controlling compensation for their top performers. One of the items for the discussion at the G20 is also going to be how to get banks to fatten their capital cushions and limit leverage of that capital.
Whatever the intentions, there are at least two factors in the U.S. that will stall progress.
First, momentum has been lost in the United States on stringent regulation of the financial markets and banks. Then, enough time has passed since the Obama economic rescue plan and bank bailout for lobbyists to do their work, which is the pressure for a lighter touch and minimal change.
Robert Weissman, president of Public Citizen in Washington, said the administration doesn’t have much new to show off to world leaders in Pittsburgh. “The number of pieces of legislation passed? Zero,” said Weissman, referring to new crisis prevention rules.
Though the administration has pressed for an overhaul of financial regulations — or lack thereof — it is unlikely fundamental change will come quickly.
In fact, Senate leaders have made it clear that they would rather do it right than do it fast, especially since Republicans on key committees are going to offer resistance every step of the way. Plus, it is the first overhaul of the system since the 1930s.
“We’ve put a band-aid on,” said John Irons, research policy director for the Economic Policy Institute in Washington, a left-leaning think tank. “The current system is not stable. You have to change the system.”
Irons said financial reform is an insider’s game in Washington. Lobbyists already have “polluted the water pretty well,” he said. Legislators’ preoccupation with health-care reform in the U.S. also has pushed financial reform off the front burner. There also is talk of waiting until 2010 to get the results of a commission looking into the reasons for the economic crisis. Barbara McDougall, former foreign minister of Canada in the Brian Mulroney government, said some regulatory efforts made in crisis mode, have not turned out well. She pointed to the relatively quick passage of legislation in 2002, Sarbanes-Oxley, which was directed at boards and accounting firms in the wake of several major accounting scandals in the U.S.
“Sarbanes-Oxley has become a real problem. It affects everyone beyond the United States who wants to make money in the United States. It was a real step backwards in terms of regulatory reform because it is so bureaucratic and so intrusive. It's an example of what happens when people have a knee-jerk response to a crisis,” McDougall said in an interview.
With the U.S. moving slowly, the question is whether there will be much appetite for the global coordination that was spoken about in London when world leaders professed the need to rebuild a failed regulatory system that allowed speculation, the creation of “exotic" financial instruments and little, if any, oversight and enforcement from regulators.
With the recession pronounced over, the emphasis has already shifted, leaving it to consumer-related groups to remind world leaders that improving numbers belie the reality of what a largely unregulated economy created. Or, as they put it in a letter to Obama before the G20: “In this era of globalization, success on domestic reforms will require reforming the current rules of the global economy.”
Except change begins at home.