In recent past statements, Mr. Obama had downplayed America’s role  in working on international bank regulations.  His Secretary of the Treasury, Mr. Timothy Geithner, has stated that America would not have a fully fleshed-out regulatory package in time for the London meeting.  It is not clear from the statement whether the new statement of the President means that this problem has been overcome.  But, it is reassuring that he is not backing away from this important agenda item.

There is not a unanimity among world leaders about the most important items on the G-20 agenda.  Angela Merkel, Germany’s Chancellor, has not agreed that a major stimulus program is necessary for the Euroland economies.  Her current proposal of about $63 billion in stimulus spending is dwarfed by the U.S. efforts of almost $800 billion recently passed by Congress and by China’s $500 billion that is already being spent.  Japan is more in the German camp, having committed to stimulus spending, but not being willing to take on much more debt to bring it off.  The U.K. is more in the American and Chinese camps.

Recent downturns in German exports, however, may move the German Chancellor off the dime, but so far, she thinks the major focus of the G-20 meeting should be bank regulation rather than deficit spending.  Japan holds a similar position.

The International Monetary Fund has called on the trading nations of the world to commit to stimulus spending of 2% of GDP for 2009 and 2010, far above the current German efforts.  Mr. Geithner, in a press conference later in the day, endorsed this goal, and he endorsed the IMF goal of funding an additional $500 billion in funding for their efforts to stabilize the weaker currencies of Asian and Central European economies.

In an earlier meeting between Mr. Obama with British Prime Minister, Mr. Gordon Brown, the Prime Minister emphasized an agenda for the G-20 that would completely restructure the original Bretton Woods agreement.  This would mean a new structure for the IMF, the World Bank and internationalizing banking regulation.  Mr. Obama did not specifically endorse these proposals at the meeting, but he may have come along some since that time.

The banks of the world are not enthusiastic about these new regulatory proposals.  Their trade association has already met and drafted their own version of what would pass muster for them.  You can guess as to the nature of their proposal.

Others think that Mr. Brown has set too ambitious an agenda for the meeting.  He, it is said, needs to be seen as a heroic figure at the meeting, given his shaky status in his own country.

There is little doubt that the world needs a new Bretton Woods arrangement.  Too much has changed since the 1944 agreement that reestablish mechanisms that promoted world trade.  Before WWI, the British pound sterling had been used as the major trading currency in the world, but WWI and WWII saw the end of the preeminence of the pound, and Bretton Woods replaced it with the U.S. dollar.

A new agreement would not likely replace the dollar in its role as the major reserve currency in the world.  There are simply no suitable currencies that have the heft to take its place.  But the IMF and World Bank, just to name two, need to be restructured, allowing greater participation by China, India and Brazil, who are becoming important players in world trade.  And, some mechanism needs to be reinforced to come to the rescue of the battered currencies of Europe’s emerging markets.  Adding a complete restructuring of the regulatory environment for the world’s banks and coordinating stimulus spending to the agenda is a long reach.

This is a hugely important meeting, and its success or failure to rise to the occasion is still up in the air. My hope is that on areas where there is still disagreement, they will agree to meet again, perhaps later in the year, to reach a final settlement.  Mr. Obama has not been if office long enough to be fully prepared for this giant a task.

Update 03/14/09

A report from the Wall Street Journal on Saturday concluded that there will not be a unified agreement from G-20 members to call for more stimulus spending.  (Click here for full article.)  Germany and France argued that their unemployment benefits and other social safety net made stimulus spending less necessary.  There was agreement to increase funding for the IMF, but the amount will be left to a later decision, and there was agreement on licensing credit rating agencies.  There will still be an emphasis by the U.S. to coordinate stimulus spending, however.

For Bloomberg’s Saturday update click here.  Their emphasis is on solving the banking asset problem–the difficulties of reaching an agreement and the difficulty of the problem itself.

A general view of the Group of Seven (G7) Finance Ministers and Central Bank Governors meeting in Rome, Saturday, Feb. 14, 2009.

The group shot above show the attendees of the meeting.  The photo below is a close up of U.S. Federal Reserve Chairman Ben Bernanke, left, U.S. Treasury Secretary Timothy Geithner, second from left, and U.S. Deputy Assistant Secretary of Treasury Mark Sobel who accompanied Mr. Geithner to the meeting.

In a joint statement, issued after the final meeting on Saturday, the members said: “The stabilization of the global economy and financial markets remains our highest priority.”

The group also endorsed Mr. Geithner’’s plan to recapitalize banks, leaving questions about nationalizing banks unanswered. Virtually all G7 members are facing a similar problem, as many of the largest banks in the world bought the toxic derivatives whose origins were in America’s largest banks.  As these assets’ true value is exposed, many banks all over the world will find themselves technically bankrupt.  No country can afford to have their largest and most influential banks go under, so they are searching for ways to put public capital in them in order to keep them solvent.  The question as to what the governments get for their money is still up in the air.  Many of the European and Asian countries have no qualms about nationalizing banks.  But this is no considered a desirable solution in America.

All of the G-7 members took a conciliatory view of China, praising the Asian giant for its strong stimulus plan.  They also muted their criticism of China for keeping the yuan relatively weak.  They are now happy if the Chinese monetary authorities keep the yuan appreciating slowly in “relative” terms.  This mean that with European currencies already depreciating relative to the dollar, China can allow the yuan to appreciate to falling currencies. This makes it much easier for China to comply and to keep their growth going.

This deference to China underscores how irrelevant the G-7 has become.   The economies that are expected to grow over this year (China, India, Brazil and South Korea) are all members of the G-20 rather than G-7:   The “old” powers of the G-7 desperately need the growth of China, Brazil and others to at least partially counter the fall in domestic demand they are currently experiencing.  America, of course, need China to continue buying its debt.  

The final verdict of the meeting is that it is a prelude to the G-20 meeting in London on April 2.  The G-20 not only includes among its members the best growing economies, it also includes heads of states as attendees rather than finance ministers.  This give it much more clout in its recommendations. 

The heaver lifting will be at the G-20 meeting.  Greater regulation of the world’s banks, expanding IMF funding and lending, and enhanced membership in the IMF for China and India will be on the table.  Also, all the committee leaders will have many additional issues to resolve.

For example, Australia’s Prime Minister, Kevin Rudd, co-chairing the G-20 working group on IMF reform, believes IMF member states will need to act quickly to reform the Fund’s governance.  This means, among other things, giving China greater membership clout and give Special Drawing Rights (SDR)to new members.  SDRs are an official international reserve asset issued by the IMF to its members, which can exchange them for freely useable currency.  Countries that joined the IMF after 1981 have never received an SDR allocation. SDRs can be used to support their own currency if it comes under attack from speculators.

There are many other issues that will be taken up at the G-20 meeting, and I will have a more detailed description of the agenda in the weeks ahead.  For an update on the agenda of the London G-20 meeting, follow http://seekingalpha.com/article/123178-prelude-to-april-s-g-20-meeting-showdown-at-the-london-corral 

the link above. (2/28/09)

The meeting is important because Mr. Geithner will be forced, to some degree, to put some meat on his proposal to salvage the American banking system. His proposal of a few days ago, as to how to spend the balance of the TARP funds, has not been greeted with any enthusiasm in America.

American banks are in horrid shape, especially our largest ones. Today, the market capitalization of our top banks is below $500 billion. Yet the International Monetary Fund estimates that the write-downs of their loan portfolios will rise to $2.2 trillion once a full accounting is required. When this happens, Mr. Geithner will be forced to step up to the task of rescuing them. But it is hard to imagine a scenario where the American taxpayer will pony up $2 trillion and not want a piece of the action. Yet “nationalization” of our banking system is not something he, or many others, want.

This state of affairs is understandable. America condones nationalization of the postal service, some parks, some forests and national monuments, but banks are a different matter. Our public sector has no experience running giant banks, and there is much resistance to trying it. Yet, we are going to be the capitalists of last resort to the giants that got us into this mess, so there will be a huge outcry to bite the bullet and take them over.

My own preference would be to nationalize them, and then set up an immediate procedure to denationalize them by breaking them up and selling them off in pieces. If they are too big to fail, as they are, then that are simply too big. We can get along without these behemoths. Local banks have served our economy well, and there is still room for large, internationally connected banks in our large trading cities. But we do not have to have banks as large and Bank of America and Citibank have become. At their current size, their mischief becomes a potential catastrophe for the entire world.

At any rate, Mr. Geithner will have his work cut out for himself as he faces his European and Pacific counterparts today and tomorrow. As Morris Goldstein, a policy analyst at the Peterson Institute for International Economics in Washington said: “There is a vacuum to be filled. The United States, as the largest global player, needs to lead the show.”

Most of the other ministers there will not have Mr. Geithner’s resistance to taking over their failed banks. The U.K. is well on its way there, now, and other will probably follow soon, as the shoes continue to fall in the banking crisis of the century.

The regular employees of these banks have not been so lucky.  The same report details how there have been about 100,000 job cuts in the banking industry since the failures began.  Unfortunately, the job cuts are coming from the ranks, not from the top. 

The taxpayers, too, are not getting a fair deal for the billions they are handing over to the failed banks.  We will have no say or right to questions decisions by the same executives who misguided their corporations to bankruptcy.

In another report, the high-flying execs at Citibank caved under pressure from President Obama and decided today to abandon plans for a luxurious new $50 million corporate jet from France.  The decision came 24 hours after the banking giant, which was rescued by a $45 billion taxpayer bailout, defended buying the state-of-the-art Dassault Falcon 7-X U.S. skies — as a smart business deal.

These kinds of stories are making it impossible to generate any public support for the bailout plans.  With staggering sums being offered and no public control over their behavior, how can anyone support them.

I hope the Obama Administration will see what is wrong with this picture and make some major changes in the way the handle the second half of the funding that is working it way through Congress now.  It is much more likely, now, that there would be some support for nationalizing the failed banks, at least for a few years, and have them operated by the Federal Government until they could be broken up and sold in smaller pieces.