Ahead of the G7
Ahead of the G7
This week’s meeting of G7 ministers comes during a time of extreme stress in the financial system. The media is already preparing us to see a G7 which in their view is not presenting a “unified” response to the situation. A “unified” response (as far as the media is presenting it) would require G7 to act exactly the same in all countries and for all financial systems. Such a response is niether practable or feasible, but the criticism probably goes beyond the point because what the media and some other observers are missing is that the G7 response to the global financial crisis has been unified in its approach if not in the exact timing of its application.
First and foremost, there has been a unified response in terms of central bank policy rates. More than that, central banks have gone out of their way to assure everyone that we can expect to see more coordinated actions in the future should the situation warrant it.
Second, much has been made of the TARP law falling short of what is needed to solve the crisis, because it supposedly does not address the issue of bank recapitalization (among other things). However, as reported earlier this week by TheLFB, the TARP law does indeed grant vast new powers to the Treasury and Federal Reserve including the ability to re-capitalize the banks, pay interest on reserves and act as an intermediary (counterparty of last resort) in the interbank (non-securitized) lending and commercial paper markets.
The Treasury has already planted the information that recapitalization is an option they are considering to use, and media outlets like the New York Times and the Wall Street Journal are duly reporting it in their Thursday editions.
So we submit that the G7 response has been and will continue to be unified in its approach, if not in the exact timing of its application. Limits on insured deposits have been increased all across the G7. Governments in Europe have nationalized (recapitalized) those institutions which required such action (Fortis, HBOS etc.). In the U.S., officials have done both. They have nationalized (in the case of Fannie Mae and Freddie Mac) and they have acted to find a market-based solution (Washington Mutual and Wachovia for example). However, the government will take an ownership stake (recapitalization) if and when the situation warrants such a move. The TARP law provides the legal and fiscal means to do so.
Most importantly, the G7 is providing a unified approach on one matter: there will be no failures of systemically important financial institutions.
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