After torturing myself by actually reading the entire G20 statement, my conclusion is that this group could now stage an "Up With People" show. The statement had enthusiastic prescriptions for generally what needed to be done, but none of the specifics.
They lay out the reasons for why the credit crisis has occurred: "market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions." Like I said, it was torture.
So if these were the mistakes made, what are their solutions? Besides the very general notion of increased coordination amongst regulatory bodies, the major piece that I read was forcing banks to increase their capital standards. At the same time, they curiously state that they want to mitigate against pro-cyclicality in regulatory policy. Huh? The passive-aggressive mental framework on this one certainly violates the governmental financial institution Hippocratic oath. They are advocating tighter credit standards during a credit crisis which is not the prescription for growth.
Fortunately, the leaders of the countries are following one mandate that they did all agree on: stimulate, stimulate, stimulate. Today, we have fiscal policy announcements from Australia, Singapore, Hong Kong, Saudi Arabia, and the UK. At the same time, we have mining companies shutting mines and firing workers globally. We have the cell phone makers getting ready for a major shake-out as orders drop. We have 2 major US banks set to cut significant numbers of jobs. Clearly, the desire to generate growth is driven by the rapid deterioration in September/October from the credit crisis.
- Japan Joins Europe in Recession, G20 Fails to Cheer
- Expect A Bad Q4 in the US
Following up on this theme in a "60 Minutes" interview, US Presidential-elect Barack Obama said that deficits are not a priority for the next 2 years. Who would've thought that Dick (Deficits Don't Matter) Cheney and Barack Obama would have something in common? While we knew the incoming Obama administration was going to spend money, the hope was that they would be constrained by the ballooning deficit.
They may still be but for now a lame duck stimulus package along with $25 billion for the auto makers seems a certainty. For 2009, a second stimulus package along with tax cuts for the middle class and additional TARP injections should be forthcoming. This means that the US Treasury is going to borrow around $550 billion in Q4 2008, $368 billion in Q1 2009, and the sky's the limit for the rest of the year. The borrowings could be as high as $1.5-$2.0 trillion by the end of the year.
This alone would mean pressure on the long end of yields, but we have everyone else on the planet borrowing as well. Therefore, spreads will continue to go higher and this may not necessarily encourage banks to lend like they normally would. I think this is one of the big reasons why we have analysts/economists predicting a long recession and a weak recovery from it.
- Global stocks slip as G20 yields no concrete steps