We face three separate crises.
The first, and purely British, is the public borrowing crisis. Borrowing has got out of hand. Debt will be Gordon Brown’s largest legacy to future generations. The G20 can't do anything about this, it is up to to us.
The second, and focused on the international banking industry, is the consequence of the financial bubble and its effects on the money markets, property values and interest rates. Here there is role for national action and international co-ordination.
The third is global: we have reached the down part of the economic cycle [a cycle Gordon Brown said he had broken… “no more boom and bust”]. The G20 has a key role in getting the global economy going.
Right now, international leadership is needed to ensure coordination and coherence in national measures to respond to the crises. The G20 process provides a valuable framework for this. It is essential that the London Summit shows real progress and a credible boost to economic confidence.
Today’s crisis shows that regulation of banking and credit institutions must be strengthened. However, regulatory reforms must be carefully calibrated and it needs to be recognised that regulation alone cannot prevent markets from malfunctioning. People are not machines, and managing of markets and expectations is really an art, not a science. However, getting the baseline right is important. The Summit should strengthen the drive to promote international standards, for example in accounting and financial reporting.
One idea is to frame a system that would make credit more expensive if the tide of cash turns to a torrent. It is usual normal now for Central Banks to have an inflation target, with the means to manage it. The same could be done for credit. It could be that a rise in credit to a set level would bring on an interest rate rise by the bank or the imposition of higher capital requirements on the banks at fault (Northern Rock…).
International trade is a major contributor to global economic growth. Falling levels of trade coupled with protectionist tendencies in some countries and the withdrawal of credit for trade finance are acute concerns. The London Summit must agree urgent measures to sustain international trade while continuing to work for the conclusion of the World Trade Organization’s Doha Development Agenda, in order to provide an early global stimulus through trade liberalisation.
The best way to bring prosperity is through trade, jobs and economic growth.
Lastly, the UK and the City of London have the capacity and the will to lead international markets through this crisis. It is in our nation’s interest that, as a result of learning these difficult lessons, the City emerges strengthened and better adapted to the needs of the 21st century.