Can the G-20 Save the World?

LONDON, March 31, 2009 -- All eyes are on London this week as leaders from the world's leading economies gather to find a way out of the growing financial crisis. But tensions are growing between the US, Europe and China, and a common course has so far proven elusive.

It is an important test for the new US president. During his campaign, Barack Obama promised fundamental change, pledged to steer a determined course in combating the global economic crisis and said he would seek greater international cooperation. It was, he said, to be a "New Deal."

This week, an important international summit meeting is about to begin, and the time has come for Obama to demonstrate that he can deliver on his promises. At their meeting in London, the representatives of the world's leading industrialized nations will discuss the global recession, a financial industry in disarray and a sharp drop in world trade.

At issue is the steepest economic downturn in decades, and everyone is waiting to see what the new man in Washington will do. Will he be responsive to the Europeans' insistence on a new global financial order? Or will he focus instead on stimulating growth in his own country?

The president who determined the fate of the London Monetary and Economic Conference in 1933, at the height of the world economic crisis, was Franklin D. Roosevelt. His eventual decision to distance himself from the conference aggravated the global trade wars and deepened the Great Depression.

Seventy-six years later, another international crisis conference is now set to begin. Once again, banks have collapsed and millions of people have become unemployed. In the wake of sharp declines in the securities markets and a sell-off in the financial industry, the world faces the prospect of widespread hardship. As the representatives of the leading nations meet in London once again, all eyes are focused on the American president.

Will National Interests Win Out?

Will Barack Obama bring success to the summit or will he focus primarily on national interests?

Most of the heads of state and government of the so-called Group of 20, or G-20, will arrive in London on Tuesday of this week. They will be accompanied by their finance ministers and the heads of their central banks, and they will come from Europe's powerful industrialized nations, from Brazil and Australia, from Russia and China, as well as from South Africa, Indonesia and India. When it comes to saving the world, it is important that all major groups and regions are represented.

The focus on Wednesday, when Britain's Queen Elizabeth II receives the regents, will be ceremonial. Prince Charles and Camilla Parker-Bowles are also expected to attend, and the assembled dignitaries will spend the evening dining with Prime Minister Gordon Brown at No. 10 Downing Street, before the actual negotiations begin on Thursday.

The conference will be held at the ExCel Conference Center in the Docklands, the former site of the London docks. Beginning at 8 a.m., the national leaders and their financial experts will attend separate working breakfasts, following by three hours of plenary sessions. There will be a "working lunch," more plenary sessions in the afternoon and, at 4 p.m., a press conference.

At that point, the heads of state and their delegations, each numbering about 20 -- guarded and protected by at least 2,500 police officers -- will tell about 2,500 accredited journalists, and the world, what conclusions, if any, they have reached.

Can this illustrious group fix the world? Will it manage, in a single day, to solve the problems associated with risk that has been building for years? Who is going to save capitalism? What needs to be done? And by whom?

There are no longer any easy answers. There are only difficult questions brought on by a crisis that ballooned to such massive proportions that it changed the world, within an extraordinarily short amount of time, in ways that no one would have thought possible.

Serious Conflict Emerging

Since the American real estate market collapsed and the international credit markets plunged into an unprecedented crisis, financial policy, among other things, has been in disaster mode. Governments have saved one bank after another from failure, flooded the markets with cheap money and assembled economic stimulus packages worth billions. But now, just as they are about to come together in London to coordinate the next steps, serious conflicts are emerging.

The conflicts revolve around issues like control over the international financial markets, the relationships among the world's key currencies and determining what economic policy is both acceptable and fair to everyone.

Despite the fact that we now have a globalized economy, the world still lacks a global policy. And, as was the case 76 years ago, there are already gaping differences among the approaches favored by the major blocs.

The new US administration wants to combat the crisis with government stimulus programs, at a cost of trillions, paid for with new debt. We must "fill this enormous hole in global demand," says Obama.

German Chancellor Angela Merkel, on the other hand, is strongly opposed to increasing government debt with additional economic stimulus programs. She favors restraint and aims to convince the other heads of state and government of the benefits of a legal barrier to excessive debt. As she said last week, she would like to "transfer" this idea "to the rest of the world."

Threat to Wall Street

The two leading Western economic powers disagree on another issue as well. To avert another financial crisis in the future, the Germans want to see tighter controls imposed on international financial markets. The United States, for its part, will ultimately refuse to accept any regulation that will pose a threat to Wall Street.

The conference is also burdened by the fragile personal relationship between the two protagonists. Merkel is dealing with a president with whom she has not yet been able to connect. Although the two leaders agreed last week to a joint approach to fixing the problems of carmaker General Motors and its German subsidiary Opel, they did so by videoconference. Merkel was not willing to travel to Washington for face-to-face talks with Obama, even though an acceptable date had already been found.

European politicians normally clamor for the opportunity to pay their first visit to a new US president. An early date is seen as a mark of prestige. But Merkel apparently saw no benefit in spending 18 hours in the air to meet with Obama for an hour.

For Merkel, the chairwoman of the conservative Christian Democratic Union (CDU), which has strong trans-Atlantic ties, this is a clear sign of guardedness. Former Foreign Minister Joschka Fischer is already warning against a new "trans-Atlantic drift."

This does not bode well for the London summit, which British Prime Minister Brown would like to turn into a major show of handshakes and kisses on the cheek. To preserve the peace, the hosts are trying to gloss over the conflicts with a show full of harmony, the roles clearly defined: Obama as the new center of world politics; Merkel as the valiant soldier fighting the powerful on Wall Street; and Brown as the successful summit diplomat.

Coming to an End

But others are also seeking to stake out their territory. Chinese Prime Minister Wen Jiabao has already suggested, ahead of the conference, that the era of the dollar as the world's key currency could be coming to an end.

And Brazil's socialist president, Lula da Silva, chimed in with a comment that was as racist as it was timely: "It was a crisis caused and encouraged by the irrational behavior of white people with blue eyes, who before the crisis appeared to know everything, but are now showing that they know nothing."

In the end, the summit, though unlikely to put an end to the current crisis, could very well make it easier to diagnose future crises before they begin. There will be a few compromises on wording, as is to be expected at an international summit meeting. The draft of the final communiqué, which the British sent to the capitals of the participating countries last week, offers a foretaste of the sort of crisis prose to be expected in London this week:

"We are determined to restore growth now, resist protectionism and reform our markets and our institutions for the future. We believe that an open world economy, based on market principles, effective regulation and strong global institutions, will ensure a sustainable globalisation with rising prosperity for all."

As lofty as these words are, they merely mask rather than solve the conflicts at hand. Nevertheless, the Downing Street authors of the communiqué did address the core issues in the remainder of the document.

Supported by Obama's new administration in Washington, they intend to stimulate worldwide growth, using all available tools and sparing no expense. For instance, the communiqué continues, the participating countries will be asked to stimulate the ailing economy with $2 trillion (€1.52 trillion). That figure, however, is still in brackets, a clear sign that it has yet to be settled on and could end up being bigger.

This sort of stimulus would "increase output by 2 percentage points and employment by 19 million," Brown's experts write. They even want to incorporate a concrete growth target for the world economy by the end of 2010 into the communiqué, as if optimism could be delineated. A specific number will be inserted during the final negotiations.

An Accelerating Crisis

The efforts of the Anglo-Saxons are likely to be met with unease in the German government. Chancellor Merkel and Finance Minister Peer Steinbrück fear that new, debt-financed economy stimulus programs could shatter government budgets, destroy the value of currencies and lay the seeds for the next crisis.

If open tensions erupt in London, the summit could end up being a failure. And yet, given the magnitude of the global crisis, nothing could be more important than cooperation and unity.

"The world needs a coordinated reaction to the crisis," says Michael Burda, a Berlin-based American economist. US Nobel Prize winner Robert Solow argues that "a uniform worldwide financial policy" is needed, while fellow economist Joseph Stiglitz calls for the "dangerous global imbalances" to be "diminished."

What the economists expect is nothing less than a coordinated strategy against the crisis. They would like to see the two dozen heads of state and government declare, in a joint statement, how they plan to cushion the worldwide recession, loosen up frozen credit markets and offset imbalances in the world economy -- and all of this without driving their own economies into new, long-term debt traps.

It would be tantamount to a stimulus program if world leaders were to resume the interrupted world trade talks, channel the flow of investment into developing nations and transfer a portion of their power to international institutions like the International Monetary Fund (IMF) and the World Bank.

The Need for Joint Action

Most of all, however, they must develop rules for the international capital markets to ensure that a fiasco like the financial crisis of recent months will never happen again. Improved control of hedge funds and derivatives would be needed, as well as regulatory agencies with the authority to take action and greater protections against credit default and rate fluctuations.

All economists agree on the need for concerted and joint action, because the world is already no longer recognizable in the wake of so many failures, including the failure of banking regulators, politicians, critical journalism and even common sense.

Last week, the World Trade Organization (WTO) announced its prediction that total global trade would decline by close to 10 percent this year. Globalization has shifted into reverse. It affects every country, industry, sector and business.

Despite that fact, the governments of the industrialized countries, faced with a crisis of such proportions, have returned to pursuing their national interests. They condemn protectionism while erecting new trade barriers at home. They invoke international cooperation while manipulating the value of their currencies. And they declare their solidarity with developing countries while allowing the crisis to affect the Third World more harshly than any other part of the world.

But the most dangerous fact of all is that they have yet to come up with an approach to combat the causes of this unprecedented economic decline. The international credit and banking crisis is still unresolved. At the same time, bad news appearing almost daily weighs heavily on consumers, businesses and the political establishment. The World Bank and International Monetary Fund (IMF) predict that the entire global economy will shrink, for the first time since World War II.

Vestiges of an Outmoded Reality

It would seem that it is high time to set aside egos and vanity. Never before has the world changed as quickly as it has in the 12 months since March 2008. At the time, Germany's DAX stock index was at 6,578 points. Germany was the world's leading exporter, and the Economics Ministry expected growth of 1.2 percent.

Only vestiges of that reality remain in place today. The DAX has lost 35 percent of its value. The stock of energy giant E.on lost €37 billion ($50 billion) in value in the space of one year. The stock market has turned into a cemetery of the major players, while everyone, including the German government, has had to lower expectations even further. Experts in Berlin already fear that the economy could shrink by 4.5 percent this year.

The wildfire in the financial markets is engulfing the "real economy" -- as if the banking industry had always been somehow unreal -- at a dizzying rate.

In late February 2008, only 15,248 short-time workers (employees whose working time had been cut to reduce output) were predicted in Germany. By the end of February 2009, that number had already jumped to 700,038. Short-time work, laying off temporary workers, hiring freezes, temporary production shutdowns -- these are the methods with which German companies attempt to delay painful job cuts.

But the first wave of layoffs has already hit Germany, with Düsseldorf-based Rheinmetall AG announcing plans to eliminate 1,000 jobs. Steel giant ThyssenKrupp expects to cut 3,000 positions, tire maker Continental wants to lay off 1,900 workers and ailing lender HSH Nordbank is letting go 1,575 of its 4,300 employees. More cuts are on the way across the board as unemployment rises. Nevertheless, they are far less dramatic in Germany than elsewhere.

According to official estimates in China, for example, 20 million migrant workers have lost their already low-paying factory jobs. In the United States, 4.4 million people have been sent home since the beginning of the recession, half of them in the last four months alone.

Left to Their Own Devices

In a globalized market economy, the patterns shaped by old political distinctions are no longer as relevant as they once were. Of all things, the communist People's Republic of China treats its workers as coarsely as the unbridled Manchester capitalists once did. Factories are shut down overnight and their entire workforces are left to their own devices -- and anger.

Conversely, the capitalist West is placing its bets on the powerful state. The US government is taking over ailing banks and insurance companies, while the government in Berlin has introduced legislation that would make nationalization of enterprises possible.

Partly because the financial intricacies of the disaster are so complex, moral debates turn into the theaters of proxy wars. At least everyone can participate and join in the general finger-pointing when the conversation turns to ethics and decency.

Attacks on top executives are on the rise, especially in Great Britain and the United States. The former golden boys have become the targets of verbal abuse, and some have even received death threats. In France, angry employees took their supervisors hostage twice in the space of a few days. And in the United States, bus trips have even been organized to the homes of AIG executives -- the insurance company that probably dug the biggest and most expensive hole of all.

And there was German President Horst Köhler -- the sometimes wooden former managing director of the IMF and chairman of the association of savings banks in Germany -- who, surrounded by the austere red-brick walls of Berlin's Saint Elisabeth Church, gave what was probably his best speech since he became German president.

Köhler stood there and said that this crisis is a "test for democracy," that "we have all lived beyond our means" and that what we need now is a "strong state that sets rules for the market." Almost everyone approved of Köhler's passionate words. But what should those rules be? And when will all of these additional responsibilities begin weighing this state?

Germany, as the world's top exporting nation, has been especially hard-hit by the global downturn. Hardly any other country has profited as much from the worldwide boom in the past few years, but now the tables have been turned. According to economists at Commerzbank, the German economy could shrink by as much as 7 percent this year. And prognoses warn that unemployment could exceed 4 million by the end of the year, possibly even approaching 5 million next year.

Currency Market Disruptions

The outlook is equally grim in the United States, where the economy shrank by 6.3 percent in the fourth quarter of 2008. The faltering of the biggest economy on earth leads to massive disruptions in the foreign currency markets, souring the mood leading up to the G-20 summit. Oddly enough, this topic is not even mentioned in the draft of the London final communiqué.

But it plays an important role, because China also suffers from a decline in the value of the dollar. The People's Republic holds the largest dollar reserves outside the United States, well over $1 trillion (€740 billion). The Chinese, for their part, can only look on as their hard-earned foreign currency reserves lose value from one day to the next.

And there is no end in sight, as the Chinese leadership notes with concern that the Americans are doing whatever they can to bring down the value of the dollar even further. Each additional billion that Treasury Secretary Timothy Geithner pumps into the economic cycle as part of his many bailout programs devalues China's dollar reserves. The currency strategists in Beijing know all too well that when it comes to their reserves, the worst is yet to come. It is already apparent that inflation will shoot up in the United States as soon as the economy begins to turn around. Ultimately, Obama can only finance his costly bailout and stimulus programs by printing money, which in turn reduces the currency's value.

Back to the Bad Old Days?

Experts believe that the current policy of easy money could catapult inflation to upwards of 10 percent in two or three years. However, the Federal Reserve and the Treasury Department in Washington have little reason to oppose this development. Inflation devalues debt, making it easy to pay down exploding government debt.

In light of these scenarios, the Chinese believe, America's vanishing currency no longer deserves its status as the world's benchmark currency. Last week, Beijing surprised the world with the proposal that the dollar be replaced as lead currency by the so-called Special Drawing Rights of the IMF, an artificial reserve asset made up of the dollar, euro, yen and British pound.

Even though the proposal will not be on the agenda on April 2, it does reveal a growing gap between the dominant economic power, the United States, and its challenger, China. The G-20 summit is perceived, at least by Washington and Beijing, as a sort of G-2 summit.

Referring to the United States, Luo Ping, a director-general at the China Banking Regulatory Commission said: "We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

Another issue that many experts believe will play a key role in overcoming the massive crisis is also absent from the agenda for the London meeting: liberating the banks from their toxic assets.

No Shared Approach

As long as these troubled assets continue to clog bank balance sheets, worldwide credit markets will remain frozen. Even though the problem is global, countries have not managed to agree on common bailout programs, let alone a shared approach. Instead, each individual government has spent the last few months puttering along on its own.

Obama's new treasury secretary, Timothy Geithner, launched the most recent bailout attempt last week, and it was apparently a success. His plan triggered a rally on the New York Stock Exchange, with Citigroup gaining 19 percent and Bank of America 26 percent. It didn't seem to matter that America's bank shares, which had once traded at premium prices, could be had for a few dollars apiece. The good times, it seemed, had returned.

Traders and fund managers were ecstatic, calling it a "win-win-win" situation and insisting that the bottom of the recession had finally been reached. Others were merely concerned that it might be "too late to get in" after the "strongest two-week rally since 1938."

But investor euphoria is premature. "Well, the stock market loved the Geithner plan, which proves … nothing," says Nobel laureate and Princeton economist Paul Krugman. The problem, according to Krugman, lies with the frozen credit markets, where there has been "practically no movement at all." Even the market-friendly Wall Street Journal maliciously laid into the freshly minted treasury secretary, noting that the best news was that he had "finally settled on a strategy."

The US government, together with hedge funds and other investors, plans to pump up to $1 trillion (€740 million) into Wall Street. This is Geithner's plan, which essentially rehashes an old idea of his predecessor, Hank Paulson.

To clean up the banks' balance sheets, Washington is offering lucrative terms to institutional investors: Anyone who purchases troubled assets in the future will be able to finance up to 85 percent of the purchase price with low-interest government loans. The government and the investor will each pay half of the remainder of the purchase price of the toxic assets.

Vast Sums with Little Invested Capital

For example, let us assume that a portfolio of mortgage-backed securities is sold at auction for $100,000. Washington and the investor each pay $7,500 in cash, while the remaining $85,000 comes from the low-interest government loan.

This sounds like a fantastic deal for hedge fund managers and other major investors, provided the plan works. Just as in the good old days, they will be able to move vast sums with little invested capital, package and shift around mortgage products, polish them up and resell them.

The best part for these investors is that they can only win, because the government carries the lion's share of the risk. "Wall Street is getting paid to re-arrange the deck chairs on the Titanic," says financial analyst Ed Yardeni, "but hopefully with a better outcome." The exotic financial products of the American real estate mania have been sitting like lead on the balance sheets of Citigroup, Merrill Lynch and the like for months. They could have disposed of these assets long ago. There is no lack of buyers, but the banks have been unwilling to go along with the kinds of discounts -- up to 70 percent -- potential buyers are demanding. Terrified of additional billions in write-downs, the banks are simply holding on to the securities.

Will Geithner's plan free up the credit market? Will the banks finally get their balance sheets under control and regain the confidence of the markets?

The discussion of the taxpayer-funded clearance sale on toxic mortgage-backed securities was still underway when Geithner launched his next offensive last Thursday, presenting sweeping proposals on supervision of the financial markets -- ideas that accommodate the Europeans abroad and placate voters at home.

The public has been outraged over the idea that once-celebrated bankers -- harkening back to earlier days -- were being paid handsome bonuses that were ultimately coming out of taxpayers' pockets. Given the current level of public anger, the concept of "control" simply sounds more attractive than the notion of a "tax giveaway."

Troubled Banks

What Geithner is proposing sounds like a revolution, at least by American standards. The treasury secretary wants the government to have the authority to intervene when troubled banks, investment funds or insurance companies pose a risk to the entire financial system.

Under the plan, hedge funds would be forced to disclose the names of their investors and trading partners, as well as their level of indebtedness. It also calls for tighter regulation of derivatives. "To address this will require comprehensive reform," Geithner said. "Not modest repairs at the margin, but new rules of the game."

The draft communiqué for the London meeting also describes what those new rules could look like. "We are agreed that the future regulation and supervision of the global financial system will be based on internationally agreed standards and systematic cooperation," the text reads.

Regulation, the draft communiqué reads, should be expanded to encompass "all financial markets, instruments, and institutions, including hedge funds." The goal is apparently to close the gaps in the existing regulatory framework.

Under the plan, a new organization would be created to monitor the stability of the financial markets and, together with the IMF, install an early warning system. The G-20 leaders also plan to introduce common guidelines for executive compensation. Tax havens and countries that are not cooperative in implementing the new rules would be ostracized and slapped with sanctions.

The tone of all of this is unexpected, especially coming from the British and Americans. But at its core, the Obama administration simply wants to repair the existing financial system. Under this scenario, as soon as investors have calmed down and a little more control has been introduced, everything will be able to continue as it did in the past. Economist Krugman writes: "Top officials in the Obama administration … still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic…. But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks."

The Americans can also depend on the fact that the Europeans cannot even agree among themselves. From Madrid to Copenhagen, the representatives of the EU countries are true masters in demanding, at international conferences, tougher rules for the global financial markets. But the minute the same rules are to be imposed on Europe, they quickly lose their steam.

The EU countries have not even managed to agree to a Europe-wide harmonization of banking supervision, even though the relevant plans have been under discussion for years.

A Developing Disaster in the Developing World

Meanwhile, many EU members are all the more energetic when it comes to protecting their own markets against too much competition from other European countries. For example, automaker Renault, responding to pressure from the French government, is shifting production from Eastern European countries back to France.

Experienced Eurocrats fear that if the German government decides to take a stake in stricken carmaker Opel, it could trigger a wave of protectionism. Other governments would begin subsidizing troubled industries or buying up shares in ailing companies.

Emerging nations have also turned to protectionist measures. Russia, for example, is raising duties on used cars, China is tightening import requirements for food and India is banning Chinese toys.

Ironically, the European Union is still seen as a model of multinational cooperation in many parts of the world. But when push comes to shove, the member states resort almost exclusively to national solo efforts. This has been the case with the bank bailouts, with each country arriving at a different solution, none of which has been completely successful to date. Great Britain, for example, opted for a government insurance solution that allows banks to insure themselves with the government against default on their toxic securities, as long as they disclose the securities.

'Out of the Drawer'

Contrary to what it has indicated thus far, the government in Berlin does not intend for now to develop a plan to relieve German banks of their toxic securities. Sources in Berlin say that if the situation doesn't deteriorate further, the existing bank bailout program will be sufficient.

Only if large segments of the banking sector or other important institutions are threatened will the government pull new measures "out of the drawer."

If that happens, affected financial institutions would spin off their troubled assets into a separate "bad bank," which would be partially owned by the government. In exchange for these shares, the healthy portions of the institutions would receive non-negotiable government bonds. Equipped with such solid assets, the banks could devote themselves to their actual business once again: lending their customers money. The spun-off toxic securities would be liquidated over a period of 15 to 20 years. The healthy banks would reimburse the government for any losses it incurred as a result.

The captains of the economic Titanic will not discuss the details of this set of issues at their London meeting. As a result, the agenda of the upcoming financial summit seems oddly unfocused.

The world leaders plan to talk about all kinds of things in London, from economic stimulus programs to the balance sheets of hedge funds, and from banking supervision to executive compensation. But they will only address the most important program as a secondary issue: A truly comprehensive, lasting and future-oriented cleanup of the infirm financial sector. In this respect, the group of officials set to attend the summit can already be likened to a fire truck pointing its hose at a collection of houses, just not at the one currently in flames.

There is another crisis issue to which the club of industrialized countries will devote only marginal attention: the devastating economic downturn in the developing world.

Problems in the Developing World

Only a few months ago, leaders in Asia, Africa and Latin America insisted that the crisis would not affect their countries. What did they have to do with derivatives, Wall Street and speculative transactions? In fact, they were celebrating growth rates of up to 6 percent and were convinced that their financial systems were immune, because their banks are hardly connected to the global financial market.

It is clear today that nowhere will the effects of the global crisis be more brutal than in the world's poorest countries. The scope of the economic downturn in the developing world is becoming more dramatic from one month to the next.

Africa's stock markets have fallen by an average of 40 percent. Ghana and Kenya have delayed the issue of government bonds worth more than $800 million (€590 million), thereby postponing the construction of important roads and natural gas pipelines.

In its report on preparations for the G-20 summit, the World Bank predicts that the global economy and world trade will shrink for the first time in 60 years, and that the weakest countries will be the hardest hit. In the next two years alone, the developing world could face a financing gap of $270 billion (€200 billion), which could grow to up to $700 billion (€520 billion).

In addition, much of the financing for major projects is vanishing into thin air because capital is either no longer flowing or is being pulled out. In Senegal, a $2 billion (€1.48 billion) iron ore mining project in the Falémé region has been delayed because the government's partner, steel giant ArcelorMittal, is in financial difficulty due to a drastic decline in the price of iron ore since the contract was signed.

Indeed, most developing countries are no longer in a position to help themselves and find a way out of the crisis. According to World Bank President Robert Zoellick, only one in four countries has the necessary economic strength for stimulus programs.

One Percent for the Poor

"We don't want handouts, but fair rules," says South African Finance Minister Trevor Manuel, who, together with an Ethiopian, will have the distinction of representing the poor at the G-20 summit.

The developing world representatives will present the conference with a program that was developed by a group of former central bankers and economists, together with German Development Minister Heidemarie Wieczorek-Zeul. The commission proposes earmarking up to 1 percent of expenditures in the national economy stimulus programs for the Third World. It also wants to see the IMF's funds augmented and the distribution of votes in the organization reformed as quickly as possible.

According to the draft communiqué, the G-20 nations want to call upon the IMF to begin selling gold reserves and use the proceeds to help poor countries.

With all the talk of gold sales, financial market regulation and stimulus packages, the London summit will at least represent progress over previous years when it comes to rhetoric. But so far the foreseeable resolutions are nothing more than declarations of intent supported by scant details.

Bundle of Measures

Economists are already a few steps ahead. To prevent new credit bubbles and bank crises, they recommend an entire bundle of measures:

The international rating agencies, which rate the creditworthiness of borrowers, should be paid by the buyers of securities in the future, not by the sellers. This would eliminate the current conflicts of interest.

Trading in so-called Credit Default Swaps (CDS) must be banned. CDSs were developed as a sort of insurance policy for credit risks, but investors used them for speculation. This, says economists, must be stopped.

The minimum capital requirements for banks, known as Basel II in industry jargon, must be tightened once the crisis ends, say experts, including Hans-Werner Sinn, the head of the Munich-based Ifo economic research institute. This would prevent banks from borrowing large sums of money without sufficient assets and betting the money on risky "innovative" financial products. A bigger capital cushion would have helped each individual bank weather the crisis more effectively in recent months.

In the real estate business, mortgage banks should assume more responsibility, once again, for the loans they issue. The reselling, slicing up and repackaging of mortgage loans must be subject to tighter controls and documentation requirements.

But such concrete resolutions can hardly be expected to emerge from the London crisis summit. If anything, the heads of state will agree in principle on a set of rules, which government agencies and international bodies will then examine at length, discuss and possibly water down.

More important than the photo ops and balanced language of the final communiqué will be the changes demanded by reality. The consequences of the financial crisis will change the global economic order to a far greater extent than any resolution adopted at the London conference.

'Cannot Wait'

The world will remain in the tight grip of recession for at least another two years. Millions of people in Europe, America and Asia will lose their jobs, and the threat of social tensions and political conflict will grow.

The days are gone when the United States could more or less dominate the global economy. Europe's importance will grow, while emerging economies like China and India will expand their roles even further.

The philosophy of unbridled financial capitalism, which set the tone for years, seems to have reached the end of its line. Governments will play a more active role in the economy for many years to come, as they clean up the ailing financial sector, bolster the economy and develop a new order in the financial and credit markets.

Much will depend on how the industrialized nations control this massive process. Tensions are growing among the major economic blocs. Will governments take steps to achieve a modicum of international cooperation, or will they succumb to the temptation to pursue nothing but national interests?

In the end, it is clear that such questions will not be decided at summit conferences stage-managed to appear in the most favorable light possible on television, but in day-to-day government work: In assembling the next budget, defining a new export subsidy or deciding whether to save a domestic carmaker or allow it to go under.

No one will play as decisive a role in this process as the new American president. The United States has lost some of its importance, but it still plays a leadership role. If Obama unilaterally places US interests ahead of international cooperation, this will also shape the policies of other industrialized nations.

The new US president would be well advised not to base his decisions on his political role model, Franklin D. Roosevelt. He blamed his political decisions in 1933, which went on to have serious consequences, on the mood among the electorate at home. International agreements on world trade are important, he said at the time, "but the emergency at home cannot wait on that accomplishment."