11 March 2009

How to slay the ‘Great Recession'

This article is excerpted from the 11 March 2009 edition of “globeandmail.com”.

THE UNITED STATES: For the Americans, the priority is to get credit flowing again. Their Job One is to free up the movement of money - preferably through co-ordinated stimulus efforts that can kick-start a recovery. More regulation for the financial system can come later. Treasury Secretary Tim Geithner has urged other countries to join the U.S. in making bold moves to pump more money into their economies.

EUROPE: Better regulation is the key, counter the Europeans. Their hope is to create an international body with cross-border power. They also want action to cut down on tax havens and make private equity more transparent. European politicians, such as German Finance Minister Peer Steinbrueck, have resisted U.S. calls to ramp up their stimulus packages, saying they are doing enough.

OTTAWA - In the fight to tame what the International Monetary Fund yesterday dubbed the "Great Recession," stimulus versus regulation is emerging as the biggest transatlantic divide.

With the global economy poised to contract for the first time in 60 years, the United States is pushing for more global economic stimulus, while European leaders favour stringent and immediate financial regulation reform.

This weekend, the world's largest economies will face pressure to put aside such differences when they gather near London to try to come up with a co-ordinated strategy to deal with the economic crisis. Policy makers will attempt to hash out a compromise at a meeting of the Group of 20 finance ministers and central bankers that is to pave the way for a G20 leaders' summit in April.

The Canadian preference, senior officials with the Department of Finance said yesterday, is to take a bit from both camps: Strengthen regulation to prevent financial crises in the future, but first make sure the world's fiscal and monetary stimulus packages are sufficient and effective, addressing more immediate concerns of a deepening crisis.

That approach will likely carry the day, said Jenilee Guebert, senior researcher at the G20 Research Group based at the University of Toronto….

Indeed, U.S. Federal Reserve Board chairman Ben Bernanke appeared to reach out yesterday, calling on governments to forge a global strategy to regulate the financial system….

But first, Mr. Bernanke said, governments need to repair the dysfunctional credit system that is holding up a global recovery. …

That position still leaves the United States a long way from the European push to "regulate everything," said Richard Kelly, a senior economist at Toronto-Dominion Bank.

He expects very little movement at this weekend's G20 meeting, mainly because the Group of Seven made little headway on setting priorities, and the addition of emerging markets to the debate will only complicate the matter….

The U.S. push for more stimulus is likely to find more support, Mr. Kelly said, because most of the G20 countries "were heading down that road anyway.”

Rather than announce richer stimulus packages, however, the G20 meeting will likely focus on making sure countries are living up to their commitments to increase and co-ordinate government spending packages, Canadian officials said….

But Mr. Kelly expects that the finance ministers will go to great lengths to show they are living up to their previous commitments to stimulate the economy, pat each other on the back, and accomplish very little. "I don't know if it's any more than window dressing."