LONDON — The leaders of the world's major industrialized nations accomplished something at their G-20 summit here Thursday that rarely happens at such gatherings of heads of state.
They produced large achievements.
They pledged the first-ever global regulation of hedge funds and private-equity firms, big players in global finance that have enjoyed operating under the regulatory radar. They agreed to a require banks to set aside more capital in good times to help them function in bad times. They vowed to crack down on tax haven nations that allow the wealthy to escape taxation. And they pledged $1.1 trillion to the International Monetary Fund and related institutions to help revive the global economy.
In short, the summit marks the end of an era of unbridled global capitalism and a turn toward stronger government oversight of economics, coordinated globally. Leaders of the Group of 20 effectively closed the door on an era of history and opened the door to a new one.
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"The world sees itself differently today than it did a year ago in some very profound ways," said David Rothkopf, a visiting scholar at the Carnegie Endowment for International Peace and former adviser to President Clinton on international trade. "The reality is that hyper-capitalism existed — unfettered capitalism, an anti-regulation attitude — because there was the perception of support for it ...You saw it in different forms around the world. That's over. I think there is a sense among these countries that ... they have a shared interest in this. The regulatory coordination is only likely to grow."
Success may depend on how well Washington and London coordinate new rules. The world's two financial capitals are Wall Street and London, and failure to enact coordinated rules could lead to the same gaming of regulatory systems that helped bring the world to the brink of financial collapse.
"A coordinated effort towards regulation would be beneficial everywhere," said Ian Cuillerier, a New York-based partner in the law firm of White & Case.
If only one dominant market is regulated, he warned, "you will have a race to the lowest unregulated market." Regulating them both in tandem would make it "more difficult to move to a third jurisdiction," said Cuillerier.
Wall Street analysts saw the G-20 consensus as a sign of what's ahead.
"Clearly you need to move the clock back on the regulatory front. Deregulation went too far, and now we're paying the price. We need to swing the pendulum half-way back," said Ethan Harris, co-head of U.S. economics research for Barclay's Capital in New York. "The concern for anyone who works in the financial markets is that the pendulum will swing too far back. Let's hope they find a right compromise."
Defenders of the old free-market order contended Thursday, however, that the G-20 communique is a recipe for trouble.
"It believes that government has all the answers, and demonstrates that the world's leading governments recognize few boundaries," the Competitive Enterprise Institute, a think tank that champions free enterprise, said in a statement. "As such, not only does the communique promise far more than it can deliver — something the voters in G-20 democracies should remember — but it may also impede global economic recovery."
In his closing news conference, President Barack Obama acknowledged that the so-called Washington Consensus — a policy prescription to developing nations encouraging deregulation and free-market economics — is giving way to something new.
To that end, industrialized nations pledged $1.1 trillion in direct aid and trade finance to poorer countries, giving a high profile to the International Monetary Fund after a decade of waning influence.
"We felt that it was very important to strengthen our international financial institutions because developing countries' emerging markets are threatened even though they not have been the cause of this crisis. They are threatened by capital flight, they're threatened by reduced trade finance, drops in consumer demand in developed countries that were their export markets," Obama said. "So we knew that it was going to be important to provide those countries with assistance," he continued. "And we have created as fundamental a reworking of the resources available to these international financial institutions as anything we've done in the last several decades."
Like Obama's U.S. regulatory plan, the G-20 plan also promises to regulate large hedge funds, the lightly regulated firms that disclose virtually nothing and invest large pools of capital on behalf of the well-heeled individuals and institutions.
Hedge funds are likely to be subject to registration requirements, ensuring that regulators know if they pose a risk to the global financial system.
G-20 leaders also called for strengthening bank reserves in good times so they aren't forced to hoard capital in bad times. This approach addresses today's problem where banks must raise capital to shore up their reserves as a cushion, making less credit available to borrowers, which worsens the economic downturn.
Perhaps as important as what was said in London was what wasn't — China and the United States got along, and China didn't question the dollar's role as the global reserve currency, as it had last month.
"They have made mistakes like everybody else in investing in non-U.S. government instruments, but their decisions to continue to hold the bulk of their reserves in dollars is a no-brainer," insisted Albert Keidel, a former Treasury Department Asia hand and now a scholar at the Carnegie Endowment for International Peace.
(Hall reported from Washington. Greg Gordon contributed to this report from Washington.)
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