Action plan – my foot

Please read the following “Action Plan to Combat Crisis”, cribbed from the IMF’s website

Yesterday, October 10, the G-7 met and agreed the following plan of action:

  1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.
  2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.
  3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.
  4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.
  5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

Now that you have read this, please tell me: where is the beef? Where are the actions? Where are the decisive actions? Where are the internationally coordinated concrete measures and steps to be taken?

If by the time the markets open on Monday morning, this vague list of pious intentions has not been complemented with a rather longer list, by each of the G-7 and preferably by each of the G-20 nations, of specific actions and measures to suppport their key financial markets and institutions, including essential cooperative measures to stabilise border-crossing markets and institutions, then stocks will continue to plummet as they did last week.  Some suggestions on what to do can be found in my previous posting on this blog.  Even sitting alone in front of my laptop in my dressing gown, I came up with eight rather specific actions.

(1) Public guarantees of interbank lending between banks in different national jurisdictions. This could be implemented by national central banks acting as counterparty of last resort in the (unsecured) interbank markets.

(2) International agreement on limits on public guarantees for other bank liabilies and for liabilities of other highly leveraged institutions.  This includes agreements on terms and conditions attached to such guarantees.

(3) International agreement on recapitalisation of banks with significant cross-border activities.

(4) Fiscal bail-outs of countries whose systemically important banks have a solvency gap that exceed the government’s fiscal capacity.

(5) International agreement on mandatory debt-to-equity conversions for banks and other highly leveraged institutions.

(6) International agreement on avoiding a moral hazard race to the bottom for deposit insurance through limits on deposit insurance (this is really as special case of (2)).

(7) International agreement on common access rules and common methods for valuing illiquid assets in different national TARP-like structures.

(8) International agreement to adhere rigorously to mark-to-market accounting and reporting principles and on common rules for relaxing regulatory requirements attached to marked-to-market valuations.

That wasn’t so hard!  I know politics is difficult, but if the desire to succeed of the participants is commensurate with their egos, I know we can succeed.

Unless specific internationally agreed measures are agreed forthwith, we are likely to discover that, for the money that would have allowed the G-7 to nationalise the bulk of their banking systems at the end of last week, it will be possible to nationalise the bulk of all listed companies by the end of next week.  The temporary nationalisation of the bulk of the G-7 banking sectors may by now have become unavoidable and indeed necessary, but I would hope that we can avoid the introduction of the other trappings of comprehensive state ownership of the means of production, distribution and exchange.  Should economists begin to dust off their manuals on central planning?

I hope that at the Eurogroup + Gordon Brown meetings this weekend in Paris, more concrete steps will be agreed.  Why not sneak in the American, Japanese and Canadian Treasury ministers and central bank governors as well, and just do the G-7 meeting of last Friday over again, this time properly?

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website