The finance ministers from the Group of 20 largest economic countries released their communiqué after meeting this past weekend. The full communiqué is here.
It has two sections. The first section is entitled "Restoring Global Growth" and the second is "Strengthening the Financial System". The critical sentence in section one: "We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions." This theme is clearly the subject of the second section and has this line, "all systemically important financial institutions, markets, and instruments are subject to an appropriate degree of regulation and oversight, and that hedge funds or their managers are registered and disclose appropriate information to assess the risks they pose."
Today, the WSJ carries a story on the Obama administration'splan for regulating the financial industry which is to be released prior to the G20 Big Dog (heads of state) meeting on April 2nd. "We want to accelerate the pace of change on the reform agenda," said US Treasury Secretary Tim Geithner after G20 small dog meeting this past weekend. The WSJ has this list of proposed changes: "An enhanced role for the Federal Reserve to monitor and address broad economic risks, changes to the way banks are overseen to prevent lenders from shopping among regulators for the easiest supervision, more transparency and stricter rules for the way money flows between banks, tougher capital requirements for big banks, and consolidation of consumer-protection enforcement."
During his 60 Minutes interview, US Federal Reserve Chairman Ben Bernanke was asked, "when does this end?" "It depends a lot on the financial system. The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery. But we do have a plan. We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time."
With the AIG news on paying out bonuses, public and private opinion is white hot against further payouts. However, the G20, Geithner, and Bernanke correctly and calmly point out what has to happen to restore the economy: it depends a lot on the financial system and what to do about it.
Regulation can be pro-cyclical and exacerbate the credit crunch as rules get tougher.
But a sound and operating financial system must exist or fear will continue to prevail regardless how angry Congress/Voters are to be bailing out groups that payout million dollar bonuses to their employees.