Note: This article was written last year shortly after the 2010 G-20 meetings in Washington, D.C. It is being re-visited for a couple of reasons: first is that the financial maneuvers and operations currently ongoing by the European Central Bank (ECB) almost identically mirror the actions of the Federal Reserve, which began its programs in 2008(and still continue today). The details of what these actions were will be the subject of another article. The second reason is that the Financial Stability Forum mentioned in the article was headed up Mario Draghi-who has recently been appointed President of the ECB and additionally, Christine Lagarde who is featured prominently in the article became head of the IMF. It’s an interesting kettle of fish-how inter-connected the global financial scene appears to be.
Over the weekend of April 15th, the G-20 finance ministers and central bank governors, comprised of some, but not all, of the 20 largest developed economies, met in Washington D.C. This was a continuation of the dialogue which was promulgated by the G-20 document of April 2009 namely: Declaration on Strengthening the Financial System. The Declaration vested “enhanced capacity” to the former Financial Stability Forum-now re-named the Financial Stability Board (FSB). For clarification, the FSB is a group which is housed and is functionally a part of the Bank for International Settlements (BIS), in Basel, Switzerland. The BIS acts as the central bank for other sovereign central banks, such as the Federal Reserve System, Bank of England, Bank of Japan, Bank of China, Reserve Bank of India, etc. The BIS currently has fifty three central bank members, comprising the vast majority of global economic activity. The Declaration also appointed the IMF with an enhanced role in the arena of financial and regulatory monitoring. Additionally, a G-20 Communiqué was issued after the meeting.
According to Euro News, one of the stated intentions was expressed as:
“… to avoid a repeat of the global financial crisis the G20 nations have decided to put the policies of seven of its members, the US, China, Britain, Germany, France, India and Japan under the microscope. The IMF will seek out imbalances in debt, trade, and budget deficits, although its conclusions will not be binding on members.”
“The guidelines operate a little bit like a net which actually holds those of the countries that violate or do not respect the guidelines and the net is a little bit tighter for those countries that are considered of systemic importance because they represent more than five percent of the GDP of the G20″, said French Finance Minister Christine Lagarde.
This regime or set-up raises questions here in the U.S. Question one: Why are these particular entities, the BIS and FSB (which are made up of various central bank representatives) being vested with so much latitude–when the central banks themselves exist to be of service to their States of origin? Additionally, the central banks in many cases are owned by their private commercial banking members. Question two: Although the IMF is performing better work than it did in the past (even though that past is quite checkered), is it really an organization in which we want to abdicate our faith to in terms of monitoring our own economy or in their parlance, “put… under the microscope” so as to be judged?
We see that the conclusions won’t be binding. However, notice Minister Lagarde’s language above, “…the net is a little bit tighter…” Is that the non-binding net for “violators” and “disrespectful” participants? Would there be embarrassment or moral suasion (persuasion and pressure) for non-compliance? What influence will this have on buyers of sovereign debt or on cross border trade agreements? How does it affect the dollar as a reserve currency? How will the Rating Agencies react to these analyses since they have had very little a priori vision (ability to analyze beforehand) in the past? There could be many other serious unintended consequences.
And so in the final analysis, principles of sovereignty could be being bypassed by international entities and coalitions, and without the approval of the United States Congress. It’s an interesting system being put into place which has the force of a treaty, and yet does not need ratification.