- The Washington Times - Saturday, November 15, 2008

UPDATED:

WASHINGTON (AP) &8211; World leaders battling a historic economic crisis agreed Saturday to flag risky investing and regulatory weak spots in hopes of avoiding future financial meltdowns.

President George W. Bush and leaders from nearly two dozen countries endorsed broad goals to fend off any future calamities and to revive the gloabl economy amid rising unemployment and shrinking savings.

“We must lay the foundation for reform to help ensure that a global crisis, such as this one, does not happen again,” the leaders said in lengthy statement after the emergency summit.

The plan endorses an early warning system for problems such as the speculation frenzy that fed the U.S. housing bubble. It calls for the creation of “supervisory colleges” of financial regulators from many nations to better detect risky investing and other potential problems.

Click here to see the ‘Declaration Summit on Financial Markets and the World Economy’

It will be up to finance ministers to flesh out the details to put such changes in place by the end of March, in advance of the next summit April 30, when Barack Obama is president.

“Our nations agree that we must make the financial markets more transparent and accountable,” Bush said.

Leaders backed efforts to improve international monitoring of markets and bolstering rules about how companies value their assets, a weakness seen as partly responsible for the crisis at hand.

A thorny issue was whether all nations should pledge to enact government spending plans to stimulate their economies. The leaders supported the benefits of that approach, but stopped short of a commitment for all to act at the same time, as some Europeans had favored.

The leaders pledged to “use fiscal measures” to energize individual countries’ economies “as appropriate.” They recognized the importance of the Federal Reserve and other central banks to order interest rate reductions to help cushion the economic fallout.

Mr. Bush on Friday evening declared that all of the leaders should “reject calls for protectionism, collectivism and defeatism in the face of our current challenge.”

“We are here because we share a concern about the impact of the global financial crisis on the people of our nations,” Mr. Bush said to the heads of state assembled around a large oval-shaped table in the White House State Dining Room. “The stakes are indeed high. Millions of hard-working people are counting on us to strengthen our financial systems for the long term.”

“The surest path to … growth is to continue policies of free and open markets,” he said. “Free-market capitalism has been an engine of prosperity, progress and social mobility in economies all over the globe.”

As the leaders ate, their finance ministers held a parallel dinner next door at the Treasury Department. The actual summit is Saturday at the National Building Museum.

Earlier Friday, the Bush administration, which has frequently warned that the world must respond with “better regulation” rather than “over regulation” in response to the crisis, outlined some of the reforms it supports.

In particular, the Treasury Department said that complex derivative products such as credit default swaps - which have played a major role in the market instability - should be bought and sold through a clearinghouse that will enable institutions to better track their level of risk.

And there was growing support for proposals such as an early warning system to detect financial problems, a “college of regulators” to supervise big banks whose operations cross many borders, and the idea of coordinated fiscal stimulus within each country, such as China’s recent announcement that it will spend $586 billion on infrastructure.

The International Monetary Fund on Friday announced it is moving to establish the warning system to pinpoint possible financial problems like housing and credit bubbles before they precipitate a crisis. The IMF, which has set up emergency financial assistance programs in nations stricken by the credit crisis, including Iceland and Hungary, is working with the Financial Stability Forum, a group that includes central banks and major financial regulators from around the world, on the new surveillance program.

In addition, a White House working group said it is setting up a system of clearinghouses to more closely manage the risky and complex derivative securities that were little understood and played a central role in the financial crisis. Derivative securities implicated in the crisis include the mortgage bonds that were derived from pools of subprime and exotic loans, as well as the credit default swaps that global banks offered as insurance on such securities.

“The virtually unregulated over-the-counter market in credit default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of [American International Group],” said Securities and Exchange Commission Chairman Christopher Cox, in announcing the new clearing procedures for such transactions that will enable regulators and the public to better track and understand them.

“Bringing transparency to this market is vitally important,” he said, pledging to use the SEC’s authority to protect investors from future abuses.

But the move did not quell criticism of U.S. policies among world leaders. European leaders have been the most strident in insisting that the world needs much stronger controls over banks and their risk-taking activities.

The Europeans want to close loopholes that allow some financial institutions to evade regulation, and ensure supervision for all major financial players, including credit-rating agencies or hedge funds carrying high amounts of debt.

“We want to change the rules of the game in the financial world,” said French President Nicolas Sarkozy, who originally called for an overhaul of global financial regulation in a “Bretton Woods II” summit.

Canadian Prime Minister Stephen Harper said “compulsory global governance … is unrealistic, will never be accepted,” but the summit should agree to measures that are stronger than those proposed by the United States.

“Unregulated financial markets do not work. Canada has known that for a long time,” he told reporters in Winnipeg before departing for the summit. “I thought, frankly, we all knew that from events of many decades ago, but obviously the United States went on a different path.”

Mr. Bush repeated his defense of free-market capitalism in an early release of his Saturday radio address.

“Reforms in the financial sector are essential,” said Mr. Bush, but he warned his counterparts not to crush the global economy under strict new regulations.

“It is true that this crisis included failures by lenders and borrowers, by financial firms, by governments and independent regulators,” he said on Thursday. “But the crisis was not a failure of the free-market system. And the answer is not to try to reinvent that system.”

Absent from the discussions was President-elect Barack Obama, who favors stronger regulation and sent former Secretary of State Madeleine Albright to meet with global leaders on his behalf.

British Prime Minister Gordon Brown emerged once again as a kind of broker between the United States and Europe, offering proposals that take a step toward stricter supervision of big banks by establishing a “college of regulators” for each bank, but stop short of heavy-handed regulation.

Besides brokering some preliminary comprises on the question of bank regulation, Mr. Brown also spent weeks drumming up support from Persian Gulf oil states and Japan for providing the IMF with additional funding to address emergencies in developing nations. And he was instrumental in getting global leaders from China to Germany to commit major sums toward stimulating their economies ahead of the summit to combat what has become a worldwide recession.

Japan said Friday that it’s ready to lend the IMF up to $100 billion to support nations reeling from the global financial crisis. Further large donations are expected from Persian Gulf states. Some countries, like China, are said to be conditioning any additional support for the IMF on gaining greater voting power on the IMF’s governing board, which is currently dominated by the United States and European nations. But chances of that happening at the summit appeared remote.

“There is a need for urgency” to address both the rapidly deteriorating economic situation and the need for better regulation of banks, Mr. Brown said.

Britain and Europe were behind efforts to set up an early warning system that would watch for financial bubbles like the one that enveloped the housing markets in the United States, Spain and Ireland. The housing bubbles eventually burst and created the mess world leaders are trying to clean up.

The crisis erupted in the United States in August of last year, but has spread to nearly every part of the globe and nearly every financial market from mortgages and stocks to commodities and student loans.

The summit is a meeting of the Group of 20 nations plus two other European countries - Spain and the Netherlands - who came at Mr. Sarkozy’s request. The G-20 includes traditional powers such as France, Britain and Germany, as well as developing economic powers such as Russia, China, Brazil and India.

In a telling sign of the importance of these emerging economies, Chinese President Hu Jintao was seated at dinner Friday night to Mr. Bush’s left, and Brazilian President Luiz Inacio Lula da Silva sat on his right.

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