Summary of the breakout conversation “World Financial Futures” at the 2009 Annual Members’ Conference.
Hon. Timothy Adams,* Managing Director, The Lindsey Group; Former Under Secretary of the Treasury for International Affairs; Member, Atlantic Council Business and Economics Advisory Group
Ms. Teresa Ressel,* CEO, UBS Securities, LLC; Former Assistant Secretary and CFO, Department of the Treasury
Moderated by Mr. Alexei Monsarrat, Director, Program on Global Business and Economics, Atlantic Council
This session was held under Atlantic Council Rules, defined by President and CEO Frederick Kempe as “Chatham House Rules with military enforcement.” Below is a general summary of the topics discussed.
The global economy is past the worst of the crisis, thanks in large part to massive state support to many sectors of the economy. We are now at an inflection point, with a long way to go before national deficits will be under control. It also remains to be seen whether the current rebound is driven by a real increase in demand, or will falter when government s remove their interventions. Our conversation with Tim Adams, Managing Director of The Lindsey Group, and Teresa Ressel, CEO of UBS Securities LLC focused on the changes that the crisis has driven and the weaknesses that it has exposed.
The G20 matters to the stability of global economy. The global response has minted the G20 as the primary steering group of the global economy, put lawmakers to work designing new financial regulation, and shown the limitations of unevenly spread global consumption and our ability to prepare the next generation for the realities of the global economy. The G20’s ascendance is a natural and overdue progression, more accurately reflecting the global economy and conferring greater legitimacy and authority in guiding economic affairs. In three summits of world leaders over the past year, the G20 has helped restore confidence in globalization and financial markets, demonstrating that governments are committed to avoiding catastrophe through international cooperation.
But cementing the G20’s role was only the first step. As Tim Adams pointed out, “the G20 can’t solve problems for us that we’re not trying to solve ourselves.” U.S. leadership will be critical as we move further from the crisis and the G20 agenda develops even as U.S. influence wanes as its deficits rise and other economic powers continue to rise. These large emerging economies will need to engage more at all levels, and be willing to accept the responsibility and the burden that comes with the opportunity to shape the global economic future. As we seek to develop a more sustainable and balanced global economy, the U.S. government should be more honest with its citizens that they must pare back consumption and cannot live the same way they have been. At the same time Germany, Japan, and China must increase domestic demand. Addressing global imbalances will take time, but should be at the top of the G20 agenda.
Regulatory cooperation and coordination have improved. The crisis exposed many limitations in financial regulation, in particular, overseers’ ability to control the growth of asset bubbles and the use of complex financial products to mitigate risk. New rules in the United States and Europe must help regulators keep up with the pace of financial innovation, ensure greater cooperation internationally between regulators, improve monitoring of banks and non-bank financial service providers, and help the financial system better serve the real economy. One positive sign of greater cooperation is that banks and their regulators are now involved in a more substantive, specific, and frequent dialogue.
It is clear from the subprime mortgage market failure that there must be greater information and education for all participants. As Teresa Ressel noted, proposed rules requiring issuers/securitizers to keep some “skin in the game” by retaining at least 5% of the credit risk, and prohibiting transferring that retained credit risk from their book, should foster closer alignment between the interests of the issuer and clients holding the same instrument(s). This would better align counterparties, the sell-side, and investors. Risk management expertise also was clearly not good enough; better risk management needs to be institutionalized. In addition, governments need to understand the effects of signals that they send to the markets. Fannie Mae and Freddie Mac, along with some federal policies, helped push many people into housing through cheap credit. Rising interest rates caused defaults which lead to rapid chaos in the mortgage-backed securities markets. Governments must understand the implications of the signals which they send and monitor the economy for the emergence of asset bubbles.
Skills and education are essential for a viable economic future. As the economic crisis has deepened, the resulting high unemployment has and will have lasting effects on human capital. Many of those laid off — including in the financial sector — do not have easily fungible skills. A central focus for education and career development should therefore be to create paths where people develop versatile skills; countries must support this shift. Indeed, the high attrition in high school and college in the United States is unsustainable; capital is mobile and to attract it, we must build the proper skill set into the labor force. The G20 should prioritize the need for governments around the world to educate their populations for the post-industrial world.
We can emerge stronger. The economic crisis has, in many ways, been the catalyst in forcing rapid change in areas which were already showing weakness. G20 has brought together the key, systemically important countries to guide the global economy and address economic imbalances. Financial regulations will be re-written to ensure for greater transparency of financial markets as well as prudent supervision of the economy at the macro-level. As globalization continues to progress, countries will need to assess how their education systems are preparing students for the realities of the 21st century economy. These changes will take years, if not decades, to achieve, but if done correctly, will create more balanced and sustainable global prosperity.
– Summary by Alexei Monsarrat, Director, and James O’Connor, Assistant Director, Global Business and Economics Program. Quotes used were approved by the speakers for attribution.