The G20's Greatest Ever Roll Of the Dice

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The ability to move money and financial markets is probably something to be envied. The market-shifting accomplished by G20 finance ministers over the weekend is another matter. In the wake of their full bore commitment to "maintain support for the recovery until it is assured," a promise that means more deficit spending and easy monetary policy around the world, markets responded by driving the price of gold up over $1,100 an ounce, sinking the U.S. dollar and rekindling stock market speculation.

It's an odd achievement for the G20, especially since the ministers, filled with their own sense of importance and power, spend most of their public time harassing banks and other financial players for excessive risk-taking. "It is critical that we end those reckless banking practices," said British Prime Minister Gordon Brown. There is talk of a new IMF-led global tax on bank assets, to make banks pay for their blunders and failures. Meanwhile, the G20 is leading the greatest roll of economic dice in history -- the 2008, 2009 and soon-to-be 2010 fiscal and monetary stimulus extravaganza.

So far, the results have been mixed. New jobs, growth and real investment have been hard to find, and more than a few economic observers calculate that the great bull run in stock and asset prices is less a sign of solid economic recovery and renewed confidence and more an indicator of a global government-funded speculative binge. How long before Mr. Brown's successor says: "It is critical that we end those reckless government stimulus practices."? By then, however, it may be too late.

For a while over the weekend it looked like the G20 meeting would produce limited progress on all fronts. Plans for a global Tobin tax on all financial transactions, a cash-generator of dazzling potential, were reportedly dashed when the United States, Canada and others balked. Named after James Tobin, the late Nobel economist who invented the idea decades ago as a means to curbing financial spectulation, a Tobin tax would be assessed as a tiny fraction of the value of all transactions. Finance Minister Jim Flaherty seemed particularly unenthusiastic, as was U.S. Treasury Secretary Tim Geithner. "A day-by-day financial transactions tax is not something we are prepared to support," said Mr. Geithner.

But then, later, Dominique Strauss-Kahn, managing director of the International Monetary Fund, said the IMF is looking at an alternative tax on banks, one that would be levied on asset values. The objective, he said, would be to build up a fund to cover bank losses when failures occur. It was unclear how this idea of accumulating money in a deposit-insurance type of structure squares with the G20's alleged interest in curbing moral hazard.

So in the end it looks like a new tax on banks is still a possibility, with the money accumulating who-knows-where. It might be an improvement over the Tobin tax, but not by much.

Also still floating aimlessly around the G20 are plans to have banks prepare "living wills." Every major bank in the world considered systemically important would have to prepare plans for its own liquidation, even though it might be rock solid. Canadian banks would, conceivably, be required to file a report to a regulator, explaining how it would go about liquidating itself in the event hit a wall. How such livings wills could be crafted to cover a major systemic breakdown in confidence doesn't appear to have been figured out yet.