G20 Breakdown

A number of key things came out of this week’s G8 foreign ministers meetings.

1. One item of importance to Canadians is that the Conservative government plans to continue with its Afghanistan withdrawal plans and be out of the country by 2011. I am happy to hear this and that Canada is holding firm against U.S. pressure to stay, though I don’t think we should have been there to begin with.

However, due to the withdrawal, the Canadian government is reasoning that there is no need for, and will not be, any more debate around Afghanistan. What? Imagine if the government decides to change its withdrawal plans due to ‘new’ circumstances? At that point, won’t we be thinking that there should have been debate during that year and a half? And

In any case, Parliament needs to be debating the things that happen over the next 21 months, a lot of time for many developments to transpire. Maybe they figure it isn’t much time since the war has been going on since 2002, but that leaves plenty of time for lives lost and people maimed over the next year and nine months.

Further, does this end of debate also include the detainee debate? Finally, what will happen after 2011? What is Canada’s role then?

Ignatieff (the Canadian opposition leader) is right, the Conservatives want to do foreign policy through the media, with no Parliamentary oversight and debate.

2. There is a plan for an Afghanistan-Pakistan border trade initiative “to help improve trade between the two countries and strengthen border infrastructure.” I don’t fully understand the details, though it does seem like a plan build an economic solution to help people economically to dissuade them from joining the Taliban. Not sure how all that will work, and it doesn’t seem like they know either. Window dressing?

3. And Iran. The G8 has been kind enough to open dialogue with Iran over their nuclear program, though they call for strong measures against them as well. Setting aside the unspeakable fact that four G8 countries are nuclear weapons states themselves, there is little evidence that Iran has nuclear capabilities, or will in the future. The White House even announced this back in February:

White House spokesman Robert Gibbs said the US “do not believe they have the capability” to enrich the uranium to the 20 percent level, as President Ahmadinejad claimed earlier today.

Iran has been enriching uranium at 3.5 percent, the level needed for its power generation program. On Tuesday they announced that they were beginning to enrich uranium at 20 percent, the level needed for their medical reactor. The IAEA indicated yesterday that Iran has converted a small percentage of its enrichment program to the 20 percent level.

Since the announcement, US officials have insisted that they needed to make haste with new sanctions against Iran, claiming that the 20 percent enrichment (though itself legal and innocuous) could have been a step toward the capability to enrich uranium above 90 percent, or weapons grade.

Just as the Canadian government announced before him, the Deputy Governor of the Bank of Canada has responded negatively to the idea of the global transaction tax. There appears to be some confusion in the article between the transaction tax (Tobin tax), as proposed by Britain and others, and the straight levy as recently submitted by Germany that seems to have a little more chance of succeeding.

Nevertheless, from this article it seems that Canadian authorities are opposing both the tax and the levy, in large part based on the idea that it will simply become a tax to pay down deficits and won’t help regulate the system.

I have trouble understanding how charging banks for their risky investment transactions wouldn’t be useful in forcing them think twice about which transactions are worth going ahead with. I guess its socialist to tax banks (but not to bail them out, apparently!)

The Bank follows the Canadian government and the U.S. Treasury (pdf) in its regulatory remedy: “improving capital and liquidity requirements of banks”.

A quick explanation: By capital requirements they are suggesting that banks would need to increase the level of capital, such as from shareholders, depositors, etc… in relation to assets (such as long term bonds or mortgage bonds) with various levels of risk, as a means to ensure they can deal with toxic assets as they come up. Liquidity requirements are about increasing cash reserves VS medium or longer term investments.

These are both passable reforms, but are not near enough to dissuade banks from taking on these assets. As Bill Greider wrote in the Nation last year, banks found ways around the rules even as capital and liquidity requirements were put in place over the past 20 years, and where they couldn’t, credit just went to unregulated ‘money-pots’ outside the banking system. It is worth noting at length:

The president, for instance, proposes to raise the requirements for capital and liquidity held by commercial banks with strict limits on leverage–their ability to borrow. That is a virtuous proposal, but it begs the question. Why did the legal limits already in place fail to restrain the appetites of bankers? Indeed, several times in the last two decades the Fed and other central banks enacted new and supposedly more effective capital requirements to curb the excesses. The big dogs of banking broke free of the leash again and again while vigilant watchdogs at the Fed and elsewhere looked the other way. Why should we expect different results next time?

One reason why old restraints failed is the so-called “modernization” that shifted the credit functions outside regulated banks and into a variety of unregulated money pots–the so-called shadow banking system of hedge funds and private-equity firms. These all interact intimately with traditional banks and give the banks profitable ways to evade the old rules or conceal the actual condition of their balance sheets from both regulators and innocent investors. This interactions are dazzlingly complex–too complex for even the bankers themselves to fully understand–but this was not an accident of nature. It was the goal of financial deregulation enacted by Bill Clinton, arm-in-arm with the Republican Congress.

Likewise, banks were allowed to play these games by legislative creation of “off-balance sheet entities” where they can park their holdings–debts or assets–beyond the view of casual observers. This is essentially the same accounting trick that empowered Enron and other corporations to hide their true condition (then collapse). The biggest bankers played roughly the same game. In fact, it was the bankers who taught Enron and others these tricks. What public purpose is served by these devices except to conceal reality from public investors? For that matter, what is the public purpose of letting corporations, banks and wealthy individuals park their wealth in the Grand Cayman Islands? Everyone in Wall Street knows the answer. It allows them to evade “legally” US regulations and tax law.

Considering these limitations, some form of bank tax seems the only appropriate starting point.

Those whose job it is to create a safe world for bankers are sure hoping to not be bothered by outsiders, as seen in the G-20 security plans that have been announced

According to Const. Ed Boltuc, a Toronto police officer and community liaison with the Integrated Security Unit:

“The Olympics that you saw recently in Vancouver was actually the largest security event ever to take place here in Canada. The G20/G8 surpasses that completely. There’s going to be a massive — absolutely massive — presence of police and security on the ground like you’ve never seen before.”

Why am I getting the sneaking suspicion that Harper, in all his ideological zealotry and his distain for democratic processes, is looking to show the world that he can kick ass with the best of them and that nothing is going to stop him from doing what he wants, where he wants? Why else would he be having the G-20 right downtown in Canada’s largest city?

The Star further outlines the plans:

This inner security zone will be strictly controlled during the summit weekend and blocked off with an “unscalable” fence rising at least 3 metres, Boltuc said. Anyone requiring access will have to pass a “five-tier system of security,”

The outer layer will be protected by Toronto police, Boltuc said. While speculation had placed the boundaries at Queen St. to the north, Yonge St. to the east, Lake Shore Blvd. W. to the south and Spadina Ave. to the west, Boltuc said the area won’t be quite that large.

There is currently a shift away from the Tobin tax on bank transactions, with many calling it dead since the U.S. and Canada won’t back it. The hope for consensus at the G20 now lies with a straight bank levy proposed by Germany and likely to be supported by the International Monetary Fund (IMF) at its meeting next month.

This is a big step backward as the transaction tax, long called for by progressive observers, seemed like a distinct possibility in the wake of the economic crisis. It would have put a 1% tax on the types of speculative transactions, such as derivatives, that became toxic and caused the crash. It would have caused investment banks to think twice about performing these transactions.

Instead, after having transferred their risk onto the government through the bailout money, they are able to carry on as before, while governments move towards insolvency. Where did all that momentum for systemic change go?

Like the Tobin tax would have been, the levy is to be used to create a bailout fund, though a German observer noted that it would be nowhere near enough to pay for future bailouts:

The country’s biggest lender, Deutsche Bank, would have to pay a contribution of 2.2 billion euros, equivalent to a third of its expected pretax profit this year, Merck Finck analyst Konrad Becker calculated in a research note, assuming a charge of 0.15 percent of total assets.

No. 2 lender Commerzbank would pay around 1.2 billion euros, Becker said.

The levy, based on total assets less deposits, would need to run for years to raise the vast sums needed for bank bailouts.

“That’s a joke,” Becker said of the 9 billion euro figure.

The U.S. and China are in a big battle right now over exchange rates – with serious global repercussions. Some are calling for this issue to be resolved through the G-20.

China relies heavily on selling cheap exports to the U.S., while the U.S. relies as much on China buying it’s treasury bonds in order to service the U.S. debt. This relationship has created a kind of an equilibrium where neither side wants to tread too strongly on the other.

However, the U.S. is accusing China of falsely depreciating it’s currency (the renminbi) so that China can increase its exports to the U.S. (and other countries) based on the low cost of buying their products. The U.S. is losing export opportunities due to it high exchange rate relative to the renminbi.

And there are calls for action against China, despite fears of retaliation. Even the U.S. Chamber of Commerce, which has done everything over the years to back China’s entrance into the world economy (at the behest of multinational corporations), is calling for the U.S. to name China as a ‘currency manipulator’ and possibly place tariffs on China.

It is also interesting to see the U.S. crying foul about a market (theirs) being artificially flooded by cheap goods (China’s). The U.S. agricultural industry has been doing this for years with cheap subsidies of corn and other products to Latin America, especially Mexico. This has wiped out much of Mexico’s domestic corn industry, knocked farmers off their land, and been a key factor in Mexican economic migration to the U.S. The U.S. has traditionally been fine with artificial markets, as long as they are not hurt themselves.

This all points to a key problem facing global capitalism in the wake of the financial crisis – lack of demand and overproduction. In the wake of low depressed wages worldwide and high unemployment, there is a scramble to get at whatever consumer demand they can round up. Thus the focus on countries like China that still have global demand for their products, and the concern that they are doing it artificially. The countries with strong trade surpluses like China are seen to be “taking more than their fair share of world demand and are under pressure to boost their domestic markets”.

Many are seeing this as a key issue for the G-20 to take up, especially as it moves to become the prime location for creating global policies for economic growth and financial reform.

It will be very interesting to watch in the weeks leading up to the G-20 meetings, as the game of cat and mouse continues between the U.S. and China.