The Main Event

he G-20 meeting in Washington, on the cold Atlantic seaboard, was a warm up to the Asia-Pacific Economic Cooperation forum that took place in Lima Peru last week. The APEC meeting of leaders from 21 Pacific Rim countries that account for half the world’s economy endorsed the Washington Declaration of the G-20 and pledged not to implement protectionist measures for 12 months ─ no matter how punishing the global downturn gets.

APEC 2008 was President Bush’s global summit swan song before he hands over the Washington reins to his successor on January 20, 2009. President elect Obama will preside over the April 2009 G-20 meeting and take on the global financial crisis head on. That is the main event that can bring about financial discipline and order to the global financial markets. Obama will personally grapple the global financial issues with his new economic team, in contrast to what he did at the 2008 G-20 meeting in Washington, when he sent a bi-partisan team of two out of respect to Bush and his presidency. Thankfully, he actually understands what is being discussed and if he doesn’t, makes sure he does. The same cannot be said about his predecessor, which can be a problem when confronted with today’s unprecedented global financial meltdown.

Capitalistic America that believes in free enterprise, individualism, none-or-minimal government interference ─ and God forbid intervention ─ allows the government to bailout and become a shareholder in America’s financial pillars of capitalism ─ AIG, Bear Stearns, City Bank, Fannie, Freddie, Wachovia and Washington Mutual. And guess who is picking up the tab? American taxpayers, as their homes are foreclosed, their gas and food prices rise and the standard of their children and grandchildren’s education plummets.

The lesson is that, when government pollutes capital markets by implicitly guaranteeing debt, market participants recognize that they will be protected if the enterprise runs into difficulty. There are exceptions. Lehman Brothers over-played its hand. That is why foreign investors, including the People’s Bank of China, hold more than $1.3 trillion in just Fannie and Freddie bonds.

The subprime crisis that started the financial tsunami, is at its base, a crisis of markets tainted by government intervention, along with the failure of the Federal Reserve to tighten monetary policy. It is also a failure of regulation to effectively monitor lending practices in the subprime market. Hopefully, Obama and his economic team at the main event in April will start to rebuild the necessary new global financial architecture to ensure it doesn’t happen again.