Stephen’s Posterous

Finance ministers and central bank governors are gathering in Washington for their annual spring meetings. The outlook is challenging, but we have not been idle.

The global economy is projected to shrink this year for the first time in more than six decades. The collapse of world trade is expected to be the largest since the end of the second world war. A global process of deleveraging is adversely affecting the availability of financing domestically and internationally. Job losses in the US have topped 5m since our recession began.

Earlier this month in London, leaders of the Group of 20 nations adopted a common strategy to restart global growth and secure international financial stability for the future. Our task in Washington is to keep at this process of repair and reform.

First, the G20 nations must follow through on their commitment to deliver the fiscal, monetary and financial policies necessary to restore growth. In the US we have passed our largest recovery programme in the postwar period. We are moving aggressively to stabilise and repair our financial system and to restore credit flows on which businesses and consumers depend. Most other countries have initiated similar forceful measures.

The collective fiscal response by the G20 for 2008-2010 is estimated by the International Monetary Fund at $5,000bn . We are acting to limit the effects of dislocations in financial markets on the financing of global trade in goods and services. Our task now is to ensure the effective implementation of these programmes and to narrow the growth shortfall. The IMF must be proactive in holding our feet to the fire of our good intentions.

Second, a strengthened and more responsive IMF is at the core of our agreed strategy for promoting recovery. The objective is not only to mitigate the effects of the global recession and the drying up of international capital flows but also to support sustained growth. This weekend we will make progress on the major IMF-related components of the London package.

Putting in place $250bn in immediate, additional, temporary financial resources to support IMF lending is substantially completed. We are also making good progress in reshaping the New Arrangements to Borrow (NAB) and facilitating its expansion by up to $500bn, incorporating into the NAB the $250bn in immediate financing.

The actual and potential availability of IMF resources on this scale has encouraged Mexico, Poland and Colombia to apply for almost $80bn in precautionary financial assistance from the IMF’s new Flexible Credit Line facility. This will boost confidence within these countries and is also an insurance policy against further global weakness.

The IMF has also taken the first steps towards implementing the London agreement to support the general allocation of $250bn in Special Drawing Rights. Emerging and developing economies would receive $100bn of this liquidity to help meet their foreign exchange obligations as necessary.

President Barack Obama wrote last week to Congressional leaders to request their endorsement of speedy US action on these measures. He stressed their critical importance to restoring the health of the global economy and therefore our own.

Third, the G20 meeting in London transformed the framework of global economic and financial co-operation. In addition to measures to boost the global economy and support the international financial institutions, leaders agreed that the Financial Stability Forum, renamed the Financial Stability Board (FSB) and expanded to include all of the G20 nations, should be given greater responsibility for the stability of the international financial system.

The US is initiating a comprehensive reform of our own system of financial regulation as part of our determined effort to lead a race to the top in regulatory and supervisory standards. That effort will not be wholly successful, however, without parallel action in other national financial systems. The FSB will play a critical role in this international co-operation.

In recent weeks, there have been some encouraging signs that the global economic downturn may be slackening. Conditions in some financial markets have improved and the decline in world trade may be abating.

However, real progress requires time, and significant risks and challenges remain. Thus, it is critical that we continue to act together to strengthen the basis for global recovery. We have an agreed strategy and a common imperative to implement our strategy with energy and dedication to our shared objectives.

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FT: Thank you for doing the interview Mr President.

Obama: My pleasure, I read the Financial Times before other people read the Financial Times. Now it’s trendy and everybody carries around a Financial Times.

FT: Let’s talk about the G-20. What will be your benchmarks for success?

Obama: The most important task for all of us is to deliver a strong message of unity in the face of crisis. There’s some constituent parts to that. Number one, all the participating countries recognise that in the face a severe global contraction we have to each take steps to promote economic growth and trade; that means a robust approach to stimulus, fighting off protectionism.

Next, we have to make sure that we are all taking serious steps to deal with the problems in the banking sector and the financial markets and that means having a series of steps to deal with toxic assets and to ensure adequate capital in the banking sector.

Third, a regulatory reform agenda that prevents these kinds of systemic risks from occurring again and that requires each country to take initiative but it also requires coordination across borders because we have a global, we have global capital markets, and that will include a wide range of steps, additional monitoring authority coordination of supervisors and various countries dealing with offshore tax havens. Making sure that…

FT: Is that a problem? Offshore tax havens.

Obama: Well, its something that is going to be discussed. I know that in my discussion I think there is a concern that we don’t want people to be able to game the system or circumvent regulated capital markets and making sure our regulations are targeting not just banks but any institution that could pose a potential systemic risk to the system.

A final area of concerted action involves international financial institutions and their capacity to assist emerging markets in developing countries at a time when those markets could be under even more severe strain then some of the more wealthy nations and I think making sure that institutions like the IMF have the resources to provide such assistance that world food supplies are not imperilled as a consequence of the break down in global trade, those are all issues that I think have to be addressed.

Now, I’m confident based on conversations that I have this week with Angela Merkel, Sarkozy, as well as with Kevin Rudd as well as conversations that I have had previously with Gordon Brown and others, that there is already a rough consensus there that by the time we arrive in London we will have taken, we will have made significant progress in moving in the right direction.

FT: Let’s just talk about the stimulus for a moment. At the moment there has been a 1.8 per cent GDP boost in 2009 by the G20 nations. There are concerns among economists that you need a sustainable stimulus and therefore 2010 is key. Will you get secure commitments from say, the Europeans, for action if necessary in 2010?

Obama: Two points I want to make on this, Number one: The press has tended to frame this as an “either or approach”. There are some G20 participants that are arguing fiercely for stimulus, others for regulation. What I have consistently argued is that what is needed is a “both and approach”.

We need stimulus and we need regulation. We need to deal with the problems right in front of us and we also need to make sure we’re taking steps to prevent these types of breakdowns from happening again.

With respect to the stimulus, there is going to be an accord that G20 countries will do what is necessary to promote growth and trade. I think there is a legitimate concern that, would most countries already having initiated significant stimulus packages that we need to see how they work.

Obviously I admire economists. I have a bunch of them on my staff. But to start making a whole host of plans about next year, without having better information on how the current stimulus efforts are working, is something that I think is of concern.

So what we are going to see is what the United States has led on this. We have been very aggressive in terms of our recovery package. The way our recovery package is structured, money is going out both in 2009 and 2010.

But each country has its own constraints, its own political rhythms and what we want to just make sure is that everybody is doing something, everybody recognises the need to make progress on this front and that we are prepared to step into the breech should current efforts prove to be inadequate.

FT: I mean that is really the great challenge, in managing this crisis - bridging the gap between what is economically absolutely necessary and what is politically possible. How do you bridge that?

Obama: That’s one gap. Then there’s a gap in ideas about how to approach a crisis like this, especially among economists - although on the issue of the stimulus there seems to be much broader consensus among both conservative and liberal economists that stimulus is appropriate.

You know, the financial crisis hit the United States first; it is now being experienced around the world. Not surprisingly we took some very aggressive action earlier than some other countries because its impact had been felt most immediately on Wall Street.

As other countries start experiencing these drastic declines in GDP and in their exports I think that the sense of urgency has grown and you are going to start seeing a convergence.

In all countries there is an understandable tension between the steps that are needed to kick start the economy and the fact that many of these steps are very expensive and tax payers have a healthy scepticism about spending too much of their money, particularly when it is perceived that some of the money is being spent not on them but on others who they perceive may have helped precipitate the crisis.

So that is always going to be a challenge and what’s also difficult is the fact that the policies we initiate all take time to take effect and by its very nature politics looks for more instantaneous gratification.

But I am confident that the American people, and I think people around the world, are looking to its leaders to lead and that some of the steps we have already taken are starting to bear fruit. We’re seeing glimmers of stabilisation in the economies and we haven’t yet seen…

FT: Glimmers of stabilisation?

Obama: Here in the United States for example, you’re starting to see pockets of stabilisation in the housing market. Our housing plan has led to the lowest interest rates, mortgage rates in a very long time and you are starting to see a huge number of refinancing in the banking sector.

In certain select markets, like the market for auto loans or the market for student loans, Secretary Tim Geithner’s efforts to provide a market for asset-backed securities has helped and so we still have a long way to go, but I am confident that if we are persistent and we don’t approach this with a thought that there is a silver bullet out there but instead are willing to try a range of methods to deliver on the economic growth in jobs that we will get out of this current crisis.

FT: You mentioned the risks and dangers of protectionism. 73 separate measures have been identified by the World Bank since the last G20 summit so what again in practical terms can your administration do at the G20 to stop this - and I’m thinking to whether there are real risks that people worry in Europe a lot about what is going on, on Capitol Hill, with “Buy American” provisions.

Obama: Well first of all I think it’s important to note that here in the United States, despite some protectionist rhetoric and very real economic frustration growing out of the collapse of the financial markets and the huge rise in unemployment that the “Buy American” provision that was in the stimulus package was specifically written that had to be consistent with WTO. That the Mexican trucking provision is now subject to negotiations to ensure that we don’t see an escalating trade war.

I have sent a very clear signal that now is not that time to offer hints of protectionism and I will continue to discourage efforts to close off the US market. I think that in a democracy, there are always going to be some loose ends out there.

That’s true here, that’s true around the world but overall I don’t think that we’ve seen a huge rush to protectionism that that isn’t the rhetoric that is emanating from the leaders that will be gathering in London.

And to the extent that the American people or Europeans or Asians, Africans, Latin Americans all feel confident that their leaders are doing everything that they can to encourage and promote economic [..] and that they have their populations interests at heart, I think we are going to be able to hold the line on any significant slippage.

FT: I wondered Mr President whether you’re concerned that, particularly following the AIG bonus controversy, there’s some danger that confidence that business has in the rule of law in the United States has been shaken and that could hinder some of these recovery measures?

Obama: I think it is a source of concern in some quarters. To the extent that the captains of industry recognise very legitimate frustrations that the American people feel when they read about huge bonuses going to members of firms that are receiving large tax payer bailouts.

I think they can take steps to lessen that danger and I met with some bankers today and it was a constructive conversation but one of the points that I made is that a time when everybody is needing to sacrifice there has to be a similar sense of sacrifice on the part of those various sectors of the economy that helped to precipitate this crisis and to the extent that they’re showing restraint that compensation packages are structured so that there is some deferral until money is returned to tax payers and the economy recovers that will be good for everybody. That will put [...] in a stronger position to help them.

But you know, keep in mind that although there are going to be, I think, emotional reactions to and legitimate grievances around some of these issues, the United States has been the world’s most successful economy precisely because of a long standing respect for legal contracts and orderly transparent and open market operations and that’s not going to change.

FT: Mr President, given the rising tendency to populism on Capitol Hill and elsewhere, do you feel confident that at a time like this you can go to Congress and ask for the kind of backing of capitalisation that most economists say will be required in the near future?

Obama: I think it is very important for us to show that the money that has already been authorised is being well spent. That it is helping to result in loans going to small business and large business that are in turn investing and creating jobs. If voters perceive that it’s a one way street that we are just pouring more and more money into institutions and seeing no return other than avoiding catastrophe then it’s harder to make an argument for further intervention.

If on the other hand people start saying that they can refinance their house, and their child can get a student loan and that small business is able to retain its credit line, so that there is a tangible and meaningful result from our measures, then I think we can win back the confidence of the American public.

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There have been many pseudo reserve currencies through the ages. Now, the governor of the People’s Bank of China has called for a new global currency “disconnected from individual nations”.

Russia, too, wants to move away from a world dominated by the dollar. Kazakh president Nursultan Nazarbayev suggests such a currency could be called the acmetal, an amalgam of “acme” and “capital”.

But is there a case for one? In theory, yes. Although no one was banging the table for change when emerging growth rates were still being powered by deliberately undervalued domestic currencies. The reserve currency status of the dollar helped to create nasty global imbalances, one of the main culprits of the current downturn.

As China, for example, recycled export earnings back into dollar-denominated assets, the US could happily run profligate trade deficits with impunity. That helped push up the price of US assets, particularly house prices.

Now surplus countries are stuck. They cannot diversify fast enough and a rapid sell down of US assets would destroy their portfolios. Not only that, global central banks holding about two thirds of their reserves in dollars are hostage to the Obama administration.

Unsurprisingly, huge budget deficits and the Federal Reserve’s leap into quantitative easing have foreigners fretting over the longer term health of the dollar.

Theory is one thing, however. In reality, currencies live and breathe more than just short-term economic air. The two other life forces for a reserve currency are sovereign credibility and power.

China, Russia and India simply do not have long enough economic track records to justify backing a reserve currency. Find a single investor in this crisis that has panicked out of dollars into roubles. Of course, if China one day emerges as the dominant economic and military power, the status quo will change. Until then, investors cannot be rushed.

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From George Soros, Chairman of Soros Fund Management and Founder of the Open Society Institute

The forthcoming Group of 20 meeting is a make-or-break event. Unless it comes up with practical measures to support the less developed countries, which are even more vulnerable than the developed ones, markets are going to suffer another sinking spell just as they did last month when Tim Geithner, Treasury secretary, failed to produce practical measures to recapitalise the US banking system.

This crisis is different from all the others since the end of the second world war. Previously, the authorities got their act together and prevented the financial system from collapsing. This time, after the failure of Lehman Brothers last September 2008, the system broke down and was put on artificial life support. Among other measures, both Europe and the US in effect guaranteed that no other important financial institution would be allowed to fail.

This necessary step had unintended adverse consequences: many other countries, from eastern Europe to Latin America, Africa and south-east Asia, could not offer similar guarantees. As a result, capital fled from the periphery to the centre. The flight was abetted by national financial authorities at the centre who encouraged banks to repatriate their capital.

In the periphery countries, currencies fell, interest rates rose and credit default swap rates soared. When history is written, it will be recorded that in contrast to the Great Depression protectionism first prevailed in finance rather than trade.

Institutions such as the International Monetary Fund face a novel task: to protect the periphery countries from a storm created in the developed world. Global institutions are used to dealing with governments; now they must deal with the collapse of the private sector.

If they fail to do so, the periphery economies will suffer even more than those at the centre, because they are poorer and more dependent on commodities than the developed world. They also face $1,440bn (€1,060bn, £994bn) of bank loans coming due in 2009. These loans cannot be rolled over without international aid.

Gordon Brown, the UK prime minister, recognised the problem and designated the G20 meeting to address it. Yet profound attitudinal differences have surfaced, particularly between the US and Germany. The US has recognised that the collapse of credit in the private sector can be reversed only by using the credit of the state to the full.

Germany, traumatised by the memory of hyperinflation in the 1920s, is reluctant to sow the seeds of future inflation by incurring too much debt. Both positions are firmly held. The controversy threatens to disrupt the meeting.

Yet it should be possible to find common ground. Instead of setting a universal target of 2 per cent of gross domestic product for stimulus packages, it is enough to agree that the periphery countries need aid to protect their financial systems. This is in the common interest. If the periphery economies are allowed to collapse, the developed countries will also be hurt.

As things stand, the G20 meeting will produce some concrete results: the resources of the IMF are likely to be doubled, mainly by using the mechanism of the “new arrangements to borrow”, which can be activated without resolving the vexed question of reapportioning voting rights.

This will be sufficient to enable the IMF to help specific countries at risk but it will not provide a systemic solution for the less developed countries. Such a solution is readily available in the form of special drawing rights. SDRs are complex but they boil down to the international creation of money. Countries that can create their own money do not need them but periphery countries do. The rich countries should therefore lend their allocations to the nations in need.

Recipient countries would pay the IMF interest at a very low rate, equivalent to the composite average treasury bill rate of all convertible currencies. They would have free use of their own allocations but would be supervised in how the borrowed allocations were used to ensure they were well spent.

In addition to the one-time increase in the IMF’s resources, there ought to be a big annual issue of SDRs, of say $250bn, as long as the recession lasts. It is too late to use the April 2 G20 meeting to agree this, but if it were raised by President Barack Obama and endorsed by others, this would be sufficient to give heart to the markets and turn the meeting into a resounding success.

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Following is the full text of a communique drawn up by G7 finance ministers and central bank governors who met in Rome on Friday and Saturday, February 13-14, 2009.

The G7, also known as the Group of Seven, is the meeting of Finance Ministers from a group of seven industrialized nations. It was formed in 1976, when Canada joined the Group of Six: France, Germany, Italy, Japan, United Kingdom, and the United States. The finance ministers of these countries meet several times a year to discuss economic policies. Their work is supported by regular, functional meetings of officials, including the G7 Finance Deputies

We, the G7 Finance Ministers and Central Bank Governors met today amid an ongoing and severe global economic downturn and financial turmoil. The stabilisation of the global economy and financial markets remains our highest priority. We have collectively taken exceptional measures to address these challenges and we reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector.

The financial measures taken by each of us are helping to stabilise extremely volatile financial markets.

These actions aimed at restoring normal credit flows to the economy follow three approaches as needed 1) enhanced liquidity and funding through traditional and newly created instruments and facilities 2) strengthen the capital base according to the competent authority's assessment of individual financial institutions and 3) facilitate the orderly resolution of impaired assets. The G7 commit to take any further action that may prove necessary to re-establish full confidence in the global financial system.

We will continue to work together and to cooperate to avoid undesirable spillovers and distortions.

What started as financial turmoil has now gripped the real economy and spread throughout the world. The severe downturn has already resulted in significant job losses and is expected to persist through most of 2009.

The policy response by the G7 has been prompt and vigorous, its full effects will build over time. Policy interest rates have been reduced to very low levels and unconventional monetary policy actions are being taken as appropriate. Budgetary action has been resolute. In addition to the full functioning of automatic stabilisers, substantial further fiscal stimulus packages are being implemented. By taking action together the effects of our individual actions will be boosted. Our fiscal policy measures adhere to principles that will increase their effectiveness.

* be frontloaded and quickly executed
* include the appropriate mix of spending and tax measures to stimulate domestic demand and job creation and support the most vulnerable.
* increase longer term growth prospects, addressing structural weaknesses through targeted investments.
* be consistent with medium-term fiscal sustainability and mostly rely on temporary measures.

We also welcome and appreciate the prompt macro-economic response from others throughout the world. In particular, we welcome China's fiscal measures and continued commitment to move to a more flexible exchange rate, which should lead to continued appreciation of the Renminbi in effective terms and help promote more balanced growth in China and in the world economy.

We reaffirm our shared interest in a strong and stable international financial system. Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We continue to monitor exchange markets closely, and cooperate as appropriate.

An open system of global trade and investment is indispensable for global prosperity. The G7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn, to refraining from raising new barriers and to working towards a quick and ambitious conclusion of the Doha round. The G7 also stresses the need to support emerging and developing countries' access to credit and trade financing and resume private capital flows, and is committed to explore urgently ways, including through multilateral development banks, to enhance this support.

This crisis has highlighted fundamental weaknesses in the international financial system and that urgent reforms are needed. We agree that a reformed IMF, endowed with additional resources, is crucial to respond effectively and flexibly to the current crisis. In this respect, we welcome the Japanese government's lending agreement with the IMF. Increased collaboration between the IMF and the expanded Financial Stability Forum (FSF) will be particularly important to develop a timely and reliable assessment of macro-financial risks. We also welcome the contribution of the World Bank and regional Development Banks to providing finance to emerging and developing countries affected by the crisis, using their resources effectively.

The G7 finance ministers have asked their deputies to prepare, in consultation with other partners, a progress report in four months on developing an agreed set of common principles and standards on propriety, integrity and transparency of international economic and financial activity.

The G7 is committed to continue working with partners in international fora to accelerate reforms of the regulatory framework including limiting procyclicality, the scope of regulation, compensation practices, market integrity and risk management.

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Demand for oil will fall this year at the fastest rate since 1982, the International Energy Agency has forecast.

The rich countries’ energy think-tank has again cut sharply its prediction for world oil demand this year, and now expects it to average 84.7 million barrels per day, down 1 million barrels per day (b/d) from last year, because of the steep downturn in the world economy. This year is expected to mark two successive years of falling demand for the first time since 1982-83.

Fuel demand has plummeted in the US and is falling in many other countries, the IEA said. Even in China, one of the countries that powered the global growth in oil demand up to 2007, the rise in consumption is expected to slow sharply.

However, the IEA also warned that sharp production cuts from Opec, the oil producers’ cartel, would mean that by the end of the year there would need to be a substantial draw-down in oil stocks, unless demand weakens even further, or supply from non-Opec countries turns out to be stronger than expected.

Opec cut its agreed production levels by 4.2 million barrels per day in the second half of last year, and could well cut production again at its next meeting on March 15, 2009, in a bid to raise oil prices from this week’s levels below $40. The IEA’s forecast for oil demand this year is 570,000 b/d lower than it predicted in January 2009, reflecting the sharp deterioration in the assessment of the world economic outlook from the International Monetary Fund.

Forecasts for oil demand in the US are unchanged, as the IEA already expected a second year of decline in 2009 following a drop of more than 5 per cent to 19.5 million b/d last year. The sharpest revisions come to forecasts of demand in the European Union and Japan. Demand is particularly weak in the industrial sector; consumption of naptha, used as a feedstock for manufacturing plastics and synthetic fibres, ”virtually collapsed” in Germany at the end of last year, and has fallen ”off a cliff” in Japan.

In China, total oil demand is still growing, but the rate of increase has slowed very sharply. As demand for oil drops, the IEA warns that its estimates of oil supply capacity are also falling, as the financial crisis and the plunge in oil prices from the summer’s peak of over $147 per barrel force companies to delay or cancel planned investment in increasing or sustaining production.

That reduction in investment is already likely to have some effect on oil supply this year, the IEA thinks, but the greatest impact will not be felt for a few years. In its next medium-term analysis of the oil market, due out in the summer, the IEA will analyse the effect of project delays on the outlook for supply over the next five years, looking ahead to the hoped-for recovery in the world economy.

When economic growth picks up, under-investment could lead to supply shortages and send prices soaring again. As the IEA puts it: ”Ultimately, low prices sow the seeds of their own destruction.”

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The International Monetary Fund said advanced economies are already in a "depression" and the financial crisis may deteriorate unless problems with the banking system are addressed. IMF Managing director Dominique Strauss-Kahn also said the European Central Bank, which held rates steady at 2% last week, has room to lower rates, but questioned the tool's effectiveness.

Late last month, the IMF slashed its 2009 estimate for global growth to 0.5%, the weakest expansion since World War II, from 2.2% two months ago.

"We are already in depression ... at least for advanced economies," Mr. Strauss-Kahn said Saturday, February 7, 2009. He said there is still downside risk to global economic growth forecasts and the "worst cannot be ruled out."

Separately, the IMF said Sunday, February 8, that the economies of the Middle East, North Africa, Afghanistan and Pakistan are set to grow at 3.6% in 2009 compared with about 5.9% in 2008. However, the extent of the slowdown depends on the fiscal response by the region's oil-exporting countries and on the depth of recession in the U.S. and Europe, said Masood Ahmed, director of the IMF's Middle East and Central Asia Department.

Mr. Ahmed flagged the possibility the IMF will again revise down its 2009 outlook if indicators such as oil prices or growth in major economies such as China fall. Mr. Strauss-Kahn said the U.S. stimulus package is the correct size and has the right mix of spending allocations, but it needs to be implemented at the same time as restructuring of the banking sector.

On the European Union, Mr. Strauss-Kahn said its officials were more concerned about inflation. He said measures such as providing liquidity and restructuring the banking sector could be a more effective tool there than reducing interest rates.

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