Not Only In America
Billions of the AIG bailout went to European banks. Will the G20 agree that this recession demands a global response?
As the leaders of the world’s major economies prepare for the G20 meeting in London, the disclosure last week that top beneficiaries of AIG’s U.S. government bailout were major European banks punctures the European storyline that the worldwide credit meltdown was "made in America". And it makes the case for the "global New Deal" proposed by Prime Minister Gordon Brown. The key word is "global."
For months, Europeans have used the "made in America" label to oppose American arguments for a robust, global economic stimulus strategy. Their opposition to joining the U.S. and China in aggressive stimulus doesn’t make much economic sense, echoing as it does the policies which deepened and lengthened the Great Depression of the 1930s. But, given the speculative bubble created in the U.S. by lax regulation, the case for asking the U.S. to carry most of the load at least seemed fair.
But no more.
Much of the U.S. government bailout of AIG went to major European banks such as France’s Société Générale, Germany’s Deutsche Bank, Switzerland’s UBS, Spain’s Banco Santander and the Netherlands’ ING. In effect, the U.S. taxpayer is protecting the viability of the titans of European finance. We know U.S. financial watchdogs slept through the last decade. Europe’s evidently were snoozing as well.
Otherwise, the European banks would not have bought the now toxic mortgage assets, thinking their risks were minimized by AIG’s balance sheet.
The Europeans are right that global financial regulation should have been tightened years ago and needs to be fixed now. But that is no excuse for not keeping their own banks out of the fantasy-land of credit default swaps. It is no excuse for asking the U.S. taxpayer to bail out their banks through AIG. And it does not justify asking Americans to carry an excessive share of the global monetary and fiscal stimulus.
That’s why Prime Minister Brown’s global New Deal is the right metaphor at the right time. Franklin Roosevelt’s New Deal was about recovery and about reform. And it worked in the U.S. for decades, until the deregulatory binge in the Reagan and Bush years. In London in April, the G20 must globalize regulation of finance to match the globalization of the financial industry.
But that’s not enough: the nations representing 85% of the world’s economy must globalize the recovery plan as well. To date, the U.S., China and a few other countries are carrying their share of the load of economic stimulus. Brown’s UK has led in ways beyond the rhetorical. But too many major economies, particularly France and Germany, have not.
In light of the AIG bailout of their banks, that’s just not fair. More than that, it’s bad economics, and it’s likely to prolong the downturn – further endangering their banks and hurting their people. A "beggar thy neighbor" stimulus plan will hurt the U.S. as well. U.S. taxpayers will have to carry too much of the borrowing load. More importantly, much of the U.S. stimulus will either leak out in purchase of foreign goods and services or be kept in the U.S. with protectionist rules.
The Europeans can be loud in trumpeting the dangers of protectionist trade laws, but protectionist stimulus policies are equally dangerous – for America and for the rest of the world.
In London, European governments and others need to join the U.S. in committing to a scale of economic stimulus that is appropriate to the danger. The International Monetary Fund has proposed fiscal stimulus of 2% of GNP. That may be too low, but the key is for everyone to begin to carry their share of the load.
Likewise, the U.S. needs to commit to high, worldwide standards of financial regulation. Business as usual – globalizing finance while protecting national turf in regulation – is a recipe for repeating the mistakes which created the worst economic crisis since the Great Depression.
The lessons of the AIG debacle are clear: today’s financial crisis is global. The responses – both for both recovery and reform – need to be global. In London on Apr. 2, the G20 needs to launch a global New Deal.
Former U.S. Ambassador to Romania Jim Rosapepe is a State Senator from Maryland, specializing in environmental and education issues. www.jimrosapepe.com