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Hope At Last

How many more people are going to lose their jobs? How long will this recession last? The G20 summit was undoubtedly a political success. It reached a series of compromise agreements on economic policy, which probably will 
help the world to recover from the 
financial crisis.

The political gains are important; they include an improvement in relations between America and both China and Russia. The US is still the great world power in defence, in political influence and in economic capacity.

However, the US used to be in a class of its own. Now, the gap has become narrower. China has become the world’s second most important economic power; Russia is still the second power in defence; the European Union is a comparable power in technology and population. India is an emerging power with a population of one billion.

The London summit was a success for a number of reasons. All the world powers are now suffering from the world recession; all wanted to reach a solid consensus on policy to restore confidence. In President Barack Obama, they found a new, strong and sympathetic leader.

Indeed in Europe, Obama is just as popular as he is at home. Of the 192 members of the United Nations, it is hard to think of more than one or two that would not happily elect him as their President. This is a strength of the development of the world community. It provides the diplomatic platform on which to negotiate agreement. Obama provides hope and humanity.

No country achieved exactly what it wanted at the London summit. Obama is a politician of the moderate Centre-Left. He would like to use the recession to establish reform, particularly of the US health system, as well as recovery. This recession may not be as serious as the Great Recession that confronted President Franklin D. Roosevelt in 1933, but it creates a similar opening for a New Deal. Yet the present recession is bad enough. Obama and Prime Minister Gordon Brown would have liked to announce a multi-trillion-dollar pledge of new money to fight the recession. They were opposed by Germany and France.

Nevertheless, every country gained something from the rescue package, which Brown estimated to total $6trillion. This included a global agreement for countries to spend $5 trillion, most of which has already been committed. On top of that, there was $1 trillion of new money to help developing countries, mainly through the International Monetary Fund (IMF).

German Chancellor Angela Merkel and the French President Nicolas Sarkozy did not want a big, new stimulus, but they did want a new regulatory system. After the London summit, Sarkozy boasted about his achievement. He said the agreement on a new regulatory regime and a crackdown on tax havens have shown that ‘a page had been turned — on an era of post-war —Anglo-Saxon — capitalism.

I’m not sure about that. Recessions can be traced back to the 16th Century. The recession page has been turned only too often. Strangely enough, there was a regulatory change of direct relevance to the banking crisis. Of the imposed technical accounting regulations that have made banks distrust each other, the ‘mark to market’ rule has probably caused the greatest damage.

‘Mark to market’ valuation becomes dangerous in volatile or falling markets. Normally, banks and assurance companies seek to match their assets and their future liabilities. Left to themselves, they would value bonds at future redemption rates so they could rely on matching the timing and value of their assets and liabilities. When the market collapses, ‘mark to market’ means the banks’ assets can collapse in value, despite the fact that the banks have no intention of selling them.

The US Financial Accounting Standards Board is now changing its rule, and relaxing what it regards as ‘fair accounting’. At the same time, the International Accounting Standards Board, which sets the rules for the EU, has promised to review its ‘mark to market’ rule; they will publish a draft proposal within six months. The first fruit of the new regulatory system is, therefore, going to be the removal of an unsatisfactory accounting rule. Some of the trouble was caused by a regulatory mistake rather than by the absence of regulation. The G20 summit will not bring the world recession to an end. There is, however, a better feeling that further disaster would be met by adequate counteraction.

The Great Recession lasted between 1929 and 1933, but had an acute phase of two years, from mid-1930 to mid-1932. One of the great economists of the period was Joseph Schumpeter, who wrote the classic work Business Cycles. He asked: When did the Great Recession reach its low point and start its recovery? ‘What are the facts? We will look first for the lower turning point. In almost all countries, particularly in Austria, Belgium, France, Germany, Hungary, Italy, Poland and Sweden, it occurs in the middle of 1932. In the English case, our chart displays a well-marked trough in the summer of 1932.”The American Monthly Labour Review published a regular index of production, which showed the rapidity of the recovery in the years after 1932. Taking 1932 itself as 100, 1933 was 119; 1934, 124; 1935, 143. Wholesale prices also recovered.

It seems possible that late 2009 or early 2010 may see the turning point of the present crisis, though recovery may not occur until later next year. The G20 summit has established a mood of relative confidence, but recessions on this scale normally create aftershocks.

Governments and individuals have too much debt, which will take them years to clear. There has also been a great swing of economic influence from North America and Europe to Asia.

The world and its leaders have these problems to overcome. But Obama and the G20 summit have raised the level 
of hope.

Lord William Rees-Mogg is a former editor of the Times. This column first appeared in the Mail on Sunday