Financial chiefs seek global unity

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By David R. Sands

They'll be in the same room, but the world's finance ministers and central bankers will be under intense pressure to show they are on the same page this weekend in Washington as the financial crisis continues to claim victims and cause havoc around the globe.

Treasury Secretary Henry M. Paulson Jr. hosts a meeting of the Group of Seven finance ministers Friday, and the International Monetary Fund and World Bank hold their annual meetings starting Saturday in an atmosphere of uncertainty and fear not seen on world markets in decades.

"They're going to have to do something collectively, because there is no way the U.S. government or any other country can do something meaningful on its own," said David Smick, head of the Washington-based market advisory firm Johnson Smick International and author of the influential new book on the changing world of finance, "The World Is Curved."

Mr. Smick said the economic problems on Main Street could be directly affected by how the world's economic powers coordinate policy and deal with structural problems with the globe's financial "plumbing." The recent panic that started on Wall Street has produced plunging stock values, shrinking retirement funds and vanishing markets for small-business and consumer loans.

"The idea that some of these guys seem to have had that you could see a major bank failure in another country and not have it hurt the American worker is out the window," said Mr. Smick. "We're all connected now."

Charles Wyplosz, director of the International Center for Money and Banking Studies at Geneva's Graduate Institute, said the connected nature of the world economy meant that partial solutions by individual governments will almost certainly fail in the face of the massive crisis of confidence.

"It is very unlikely that one country will be able to salvage its banking system if others fail," he said.

The crisis that had its roots in the American mortgage market has led to a worldwide meltdown, with central banks in Europe, North America and Asia desperately trying to jump-start credit markets, bail out failing banks and reassure terrified investors.

IMF Managing Director Dominique Strauss-Kahn warned that the world was "on the cusp of a global recession" and all but begged the world's financial leaders to coordinate policies, following up on the surprise interest rate cuts announced by the Federal Reserve and five foreign central banks Wednesday.

"All kinds of cooperation have to be commended. All lonely acts have to be avoided," Mr. Strauss-Kahn said in a press briefing Thursday.

World Bank President Robert B. Zoellick said that the problem wasn't confined to the world's wealthiest regions. Developing countries, he said in an interview with the Reuters news agency, were struggling with higher food and fuel prices even before the financial crisis hit.

Economists and market analysts say the ad hoc nature of the response from leading Western governments has contributed to the crisis. Washington, London and leading Western European capitals have at times adopted markedly different strategies on such critical issues as encouraging interbank lending, supplying fresh capital to banks and protecting the holdings of nervous bank depositors.

Barry Eichengreen, an economics professor at the University of California at Berkeley, warned that an unproductive G-7 meeting could make things worse.

"Their empty platitudes will further demoralize the markets," he said in a collection of proposals by top international economists put out Thursday by the London-based Center for Economic Policy Research.

But Mr. Paulson Wednesday seemed to resist some ideas for policy coordination on the fiscal side to match what the world's central banks pulled off on the monetary side.

He was noncommittal about whether the Treasury Department would adopt a suggestion by British Prime Minister Gordon Brown that governments guarantee interbank lending - the flow of money between banks that is key to keeping the credit markets oiled.

"When we look at the G-7, we have very different countries, economies of different sizes, financial systems with different needs," he said, "and so it would not make sense to have identical policies."

Those countries that have challenged what they see as a U.S.-built and U.S.-dominated financial system are claiming vindication. Populist Venezuelan President Hugo Chavez, backed by the country's immense oil reserves, said his country is positioned to ride out the crisis.

"There's a specter that is going around the developed world that was of its own making," Mr. Chavez said at an economics conference in Caracas Thursday. "It's like a Frankenstein."