An absence of leadership

By Richard Adams, Comment is Free’s Washington editor (THE GUARDIAN, 13/10/08):

After a weekend of frantic meetings in Washington to deal with the financial tsunami, the result was perfectly summed up by yesterday’s Washington Post: “World leaders offer unity but no steps to ease crisis”.

The hope was that the exclusive club of finance ministers and central bankers would meet and provide concrete plans to tackle the crisis. What they delivered instead was more of the same: ringing declarations that governments would “take decisive action” and “all necessary steps”, as the G7 communique put it. What that decisive action would be, and exactly what steps would be necessary and to what effect, remains a mystery.

On Saturday evening in Washington, President Bush even put in a cameo appearance at the meeting of ministers from the G20 – a wider pool of countries, including Brazil, India and Saudi Arabia. The result? An endorsement of the same vague principles as G7.

What Washington couldn’t achieve, perhaps Paris will? The signs are that the eurozone leaders, and Gordon Brown, meeting yesterday, are prepared to take action to guarantee lending between banks. That would be a major step.

But what’s good enough for Europe should have been good enough for the G7, and the US. To unfreeze the credit markets, the G7 governments could have agreed to underwrite lending between banks across national borders, by using central banks to act as joint counterparties. To rebuild international banking there could be an agreement to concentrate recapitalisation on banks that also operate in markets outside their home country. As Ireland and Iceland show, individual government policies can have huge ramifications elsewhere. Those two steps alone would have been simple. But not for G7. If there was ever a Washington consensus, it wasn’t on display last weekend.

The one bright spot from the G7’s communique was a pledge that its members would ensure “banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources”. That’s important – a recognition that government funds are needed to rebuild the financial system. Britain has already taken that step, through the chancellor’s £50bn bank bail-out, and the US belatedly followed suit over the weekend when it announced that it was going to provide capital to US banks in return for equity stakes. From Paris yesterday, the hints were that the eurozone countries will also adopt the British model.

The other good news was the IMF’s recognition of the damage the financial crisis is causing poorer nations. With the rich nations’ financial malpractice the culprit, the IMF won’t be hectoring developing countries as it did during the Asian financial crisis 10 years ago.

Despite silver linings, the cloud remains. While governments talk of providing leadership, there has been a signal absence. Governments need to counteract the effects of the credit crunch using public spending to help domestic economies. Curing bank lending alone will not solve the problem if consumers crawl into a hole.

While this is an international crisis, the lack of leadership from the US has been aggravating. It can’t be blamed for everything, but it can be indicted for sitting on its hands for too long. Few predicted the severity of this crisis, yet once Bear Stearns collapsed there could be no excuses. That was back in March. Six months later, the full extent hit home. Had the US administration rounded up international support and taken immediate action on its own shores, the worst could have been avoided.

The US treasury’s mistake in allowing Lehman Brothers to go bust sparked the current crisis of banking liquidity. At the time US conservatives were applauding. Now they aren’t – although many remain hostile to government intervention, that is the only way out of this mess.