A better G-20 agenda (Part 1)

By Philip Zelikow

What is the agenda for G-20 action?

The issues for the G-20 summit next month are becoming clearer. But there are so many issues, it really is useful to map them out. I tried something like about six weeks ago, in the context of the arguments about the administration’s stimulus package. So, looking ahead to the G-20 summit, I will lay in a series of posts a six part agenda from the peanut gallery … complete with questions and suggestions for clarifying thought.

But first, a more fundamental point: I hope the Obama administration does a terrific job. From the outside, it is awfully easy to slide into a habit of thought that, every time the administration stumbles, sees opportunity. And if you work on the Hill or an opposition think-tank, you may be getting paid every day to come up with fresh talking points on the administration’s latest outrage against the good people of America. That pattern does tend to build up certain muscle reflexes.

So I urge a conscious effort to extend plenty of benefits of plenty of doubts. First, of course, we all want our country to succeed. Senator McCain has already offered this reminder, so it requires no elaboration from me. Second, Republicans, in particular, should pause and ask themselves this question: Given the setting for this crisis, if conditions get dramatically worse and on a global scale, do you really believe most Americans will then say, "Gee, this is scary, let’s cut back on government and trust the free market to fix this"? Maybe not. At least concede the large possibility that, if Obama fails dramatically on the economy and conditions become dire, Republicans — or at least moderates like me — will not like the political results of what will happen when people get frightened on a very large scale, worldwide.

History does not provide any answers, but it does offer a few reminders about the possibilities. Recall, for instance, that FDR won in 1936 by taking his party to the left and sharpening the anti-business rhetoric. (In doing so, he alienated the national planner technocrats like Raymond Moley and Rexford Tugwell, men who had been core New Dealers and thought the state should work in association with big business.) By moving left in 1936, FDR was actually finding the new political center. His most dangerous adversaries in 1935-36 were not those on the pro-business right. That faction had already been discredited for the majority of Americans. FDR’s publicists loved the businessmen’s "Liberty League" — just as Obama’s people love to make Rush Limbaugh the face of the Republican party.

What really worried FDR and his aides were the radical populists like Huey Long, Father Charles Coughlin, and Francis Townsend who, together, represented a very large, volatile force in American public life. It is probably fortunate for the United States that this force never unified around a potent catalyst. And this was at a time when the country was slowly pulling out of the Depression, before the 1937 relapse.

It is still too early to judge the Obama administration’s policymaking on a great many matters. Even with the budget, I don’t know how the administration plans to reconcile its various goals. Then again, I’m pretty sure they don’t know yet either. My prevailing sense of the Obama team now is that of a handful of people frantically coping, laying down a few big markers and delegating to congressional barons, as they slowly try to get organized, get their people into office, and flesh out their own ideas.

That said, here is the first part of a better agenda for the G-20 summit:

The national and international agenda for the banking crisis needs to take shape.

According to the Financial Times, the head of the Banque de France, Christian Noyer, is "softly spoken and known for choosing his words carefully." So I paid attention when Noyer made three major points last week:

First, that European and French monetary policy was doing more easing than was generally realized, pumping money into the Eurozone. (Fed Chairman Ben Bernanke and his institution followed suit in a big way this week; more on that in a later post.)

Second, Noyer said that it was now more important to stabilize financial systems than to embark on fresh public spending programs.

Third, Noyer had some gentle chiding for the United States: "I have the impression that we are a little more advanced [on stabilizing financial systems] in Europe than in the US. It is clear that the US authorities are making every effort to reach that goal but that is probably as important as the size of the stimulus itself if we want to stabilize the economy."

There is a large argument about how to address the banking crisis between the "liquidity" and "insolvency" schools. The "insolvency" school has adherents across the political spectrum and calls for more radical government action now to take over and quickly restructure banks and their balance sheets.
I am attentive to the debate without feeling qualified to judge who is right, though it certainly is worthy of notice when a conservative Republican like James Baker (a former Reagan Treasury secretary) comes out on the side of "insolvency." This is an interesting situation, defying the usual ideological categories, in which both Republicans and Democrats feel the Obama administration is being too conservative.

So look carefully at what the IMF recommended to the G-20 finance ministers last week. Their lead recommendation was that the G-20 should tackle the financial sector problems "head-on." Look at the language: "Policymakers must resolve urgently balance sheet uncertainty by dealing aggressively with distressed assets and recapitalizing viable institutions." It appears the IMF has taken the more radical "insolvency" side of the argument.

Also clear is that the United States cannot and should not adopt a unilateral approach to salvaging "its" banks. I write "its" in quotation marks, because an entity like Citigroup is not really just a U.S. bank. It provides banking services to customers around the world. So does Deutsche Bank, for that matter. So do many others. These are transnational institutions.

The European-based banks may even have more risky exposure than the ones headquartered in the United States. In congressional testimony, former IMF chief economist Simon Johnson has observed that the European-based banks may not just be "too big to fail." They are "too big to be saved," because of the proportionate size in comparison to their governments’ resources.

So it is reasonable for outsiders to look hard at how, if at all, the G-20 leaders display their recognition of their need to develop a harmonized approach toward the banking crisis, especially since this issue goes to the very heart of the current crisis. Right now the international policy cooperation does not look reassuring.