Racing to the Summit

The Bush administration initially wasn't enthusiastic about this weekend's meeting of the Group of 20 nations to discuss the global financial crisis. But the summit is going to happen anyway, and maybe that's the real point. Having fouled the global economic nest, America must now work with other nations to clean it up.

The meeting is intended to send reassuring signals to global financial markets that a coordinated global rescue and recovery are on the way. And good luck with that! The danger is that the hastily organized summit, hosted by a lame-duck U.S. president, will also convey a subliminal message of discord over the future of the global economy.

The summit will mark several important, but potentially bumpy, transitions: the arrival of China as a co-manager of global prosperity; the new assertiveness of Europe in arguing for its own, Brussels-style transnational approach to financial regulation; and the growing anger of developing economies such as Brazil, which feel caught in a downturn for which they had no responsibility.

This gathering of 20 nations is a reminder, above all, that the smaller club of rich nations known as the Group of Eight has failed to stop the financial disaster. "This crisis has made all participants in the system more equal," says Antonio Patriota, Brazil's ambassador to the United States.

Anger toward America for creating the financial contagion is a powerful, if largely unstated, theme. During a conference call Monday among G-20 members to prepare for the summit, there were complaints about "the speculation and deregulation in the U.S. that became this market tsunami," according to one participant.

What's frustrating is that even as the summiteers debate big, woolly issues of financial architecture, the global economy remains crippled by nettlesome technical problems. Financial institutions are continuing to sell assets in a falling market to meet capital requirements or other rules. These "pro-cyclical" practices are reinforcing the downward spiral, and the G-20's penchant for rule-making and regulation may make the pro-cyclical problem worse.

"Maybe we have turned a corner, but it's a corner in an octagon," the worried chief executive of one leading global hedge fund told me this week.

The godfather of the summit is French President Nicolas Sarkozy, who is in his last months in the rotating presidency of the European Union. He paid a quickie visit to Camp David to lobby President Bush personally for the summit and prodded other European nations to support a far-reaching package of new regulations. Administration officials chafed at Sarkozy's campaign, but in the crisis atmosphere they decided not to fight it.

The French have been lobbying for a draft resolution endorsed last Friday by European leaders in Brussels that calls for global supervision of rating agencies, convergence of accounting standards, coordination of financial oversight across national boundaries, "codes of conduct to avoid excessive risk-taking in the financial sector," and, finally, a leading role for the International Monetary Fund in overseeing the recovery and regulation package. The French want another summit in 100 days to ratify these measures, with the blessing of President Obama.

Bush administration officials support some items in this package, but they are wary of the unintended consequences of new regulations -- particularly ones that are rushed through during a crisis. The big need right now, many analysts argue, is for fiscal stimulus on the model of China's massive $586 billion package announced this week, rather than a new regulatory architecture.

A simpler set of reforms would address the practical reasons why, months into the crisis, financial institutions are still being forced to sell at distressed prices. One example is the so-called Basel II capital standards for banks, published in 2004 by the Bank for International Settlements. Though intended to provide a cushion for hard times, these standards are now forcing banks to liquidate assets to raise capital. Instead, it's argued, the BIS should adopt a countercyclical approach in which banks post more capital during good times and then draw it down when the economy declines. Similar countercyclical measures are needed for rules that affect insurance companies and other big players -- so that their forced selling doesn't exacerbate the crisis.

This weekend's gathering has been billed as a new Bretton Woods. But as one commentator has noted, that epochal 1944 conclave took three years to prepare, whereas this one has taken about three weeks. Even for a world that's angry with America, it makes sense to build the new financial framework more carefully.

David Ignatius