Standing Shoulder to Shoulder, But What's Next?
In a one-page “Plan of Action” issued this evening, the finance ministers and central-bank governors of the G-7 called for “urgent and exceptional action”; declared five principles to guide the seven economically powerful countries as they address the global financial crisis; and promised further cooperation. The one thing it didn’t include was any concrete action.
That may be a lot to ask, of course. As Treasury Secretary Henry Paulson said in a press conference after the release, it would be foolish to expect seven very different countries — with different economies, laws and governing traditions — to do the same things to address a crisis that has manifested itself to different degrees in each. And yet, many were expecting something; whether Friday’s announcement fits the bill remains to be seen.
Friday morning, well before the announcements, Brookings Institution economist Robert Litan — a former OMB bigwig and Justice Department anti-trust official, among other things — argued that announcing a coordinated policy might not accomplish much, but it wouldn’t hurt. And failing to do so might.
“If the market foresees that the leading countries don’t have their act together and aren’t acting in concert, that’s probably just more bad news,” Litan said. “Acting in concert is just a damage-limitation thing.”
The G-7 statement had its share of platitudes. The countries vowed to "take decisive action and use all available tools to support systemically important financial institutions and prevent their failure." They will "take all necessary steps to unfreeze credit and money markets" and "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." They swore to do all this, and more, "in ways that will protect taxpayers and avoid potentially damaging effects on other countries," using "macroeconomic policy tools as necessary and appropriate." They support the International Monetary Fund's help. They'll keep working together.
But how? How much? When? Quizzed afterward in an Office of Thrift Supervision room packed with journalists from around the world, Paulson wouldn't get specific about when the Treasury expected to swing into action buying buying or insuring assets, taking equity stakes in financial companies, buying and modifying mortgages -- the new tools this month's financial bailout legislation offers.
"We're not wasting time -- people are working around the clock to do this," he said. He said it was critical to act quickly, but also to get it right. "This is a plan that I'm quite confident will work," he said.
He called the statement unusual -- instead of the ordinary post-meeting statement about what was discussed, the group offered something they all actually agreed upon. "There weren't differences on what we needed to do," Paulson said. (See for yourself: the G-7 finance ministers' statements for Oct. 19, 2007 and Sept. 16, 2006.)
Nor would he get specific about how the Treasury would divvy the $700 billion at its disposal up between buying troubled assets from banks and financial institutions, and injecting capital into them. Yet throughout the press conference, his emphasis was very much on injecting capital, and he said the agency was working on guidelines for buying non-voting stakes in companies. Liquidity -- the watchword when he and Fed Chairman Ben Bernanke first sought the new powers from Congress -- remained important, he said, but the new tools at his disposal "are all focused on one thing: recapitalizing financial institutions."