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Fears growing that moment for joint action could be lost


BY HOWARD SCHNEIDER Two years after investment


bank Lehman Brothers collapsed and the financial system faltered, world leaders are deadlocked over key proposals for ensuring that such a crisis doesn’t happen again, and concern is spreading that the chance for common ac- tion has waned. Officials at agencies such as the


International Monetary Fund and the World Bank say they’re worried about the loss of momen- tum, and private analysts are warning that narrow national interests could undermine fur- ther reform. There is increasing tension


over currency rates and a grow- ing expectation that the world’s


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TUESDAY, OCTOBER 5, 2010 World leaders at impasse over proposals for financial reform


major financial centers will each impose substantially different rules on financial firms — a scenario that senior finance offi- cials such as Treasury Secretary Timothy F. Geithner have hoped to avoid. In passing legislation this sum-


mer to overhaul financial regula- tion, Congress addressed some of the threats facing the economy. But other countries are poised to move in different directions. Banks in New York, for instance, could be subjected to different fees, taxes and requirements than those in London, Frankfurt or Zurich. “Urgent action is needed to


arrest the disturbing trend to- wards unilateral moves,” Charles H. Dallara, managing director of the Institute of International Fi- nance, wrote in a letter this week to top IMF officials. The IIF represents the world’s


major financial firms. At a Mon- day news conference, Dallara said growing parochialism


among nations is sapping confi- dence in the strength and dura- bility of the economic recovery. At the IMF, meanwhile, top


officials say they are concerned that the overhaul of global finan- cial rules has stopped short of what is needed to best insulate the world from a repeat of the recent crisis that threw major economies into recession, under- cut global trade, and left the developed world saddled with record levels of debt and the prospect of sustained high unem- ployment. “The more we continue with


the present system, the more likely we are to have a relapse,” said Jose Vinals, the IMF’s finan- cial counselor and head of its capital markets department. “Unless we deal with these prob- lems, we will not have a safer system.” Vinals and Dallara,amongoth-


ers, are worried that if national policies are not coordinated, cap- ital will gravitate to where it is


most loosely regulated and the risk of another crisis will in- crease. Underscoring the concerns, Switzerland announced Monday that it would enact capital rules far beyond those expected in other countries, while Brazil said it would double the tax imposed on some forms of foreign invest- ment. The cautionary statements


come ahead of IMF meetings this week likely to be dominated by discussion of whether the reform of global financial rules has gone as far as politics allows. Leaders of the world’s top economies pledged in the wake of the Lehman Brothers collapse to work together to make the global financial system less prone to booms and busts. Leaders did reach agreements on an array of subjects, such as increasing the amount of cash and highly liquid assets that banks must set aside as a cushion against losses. These are changes that many analysts


agree will make banks better able to survive a downturn. But debate over more funda-


mental changes has made little headway. Differences remain, for example, overhowto identify and regulate firms that are consid- ered too large or interconnected with other big companies to fail. And there is no agreement over how best to create a system in which such companies can col- lapse without the need for a taxpayer bailout. Financial ex- perts at the IMF and elsewhere argue that firms must be allowed to fail. Otherwise, large compa- nies may pursue excessively risky strategies, confident that they will be rescued by the govern- ment if they get into trouble because of the damage their col- lapse could cause. Months of meetings among


global policymakers also have failed to produce a plan for curb- ing asset or credit bubbles. Such an approach is considered a linchpin of a safer system but has


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so far proved technically difficult to design and politically contro- versial. The U.S. financial over- haul law, for example, requires policymakers to propose regula- tions that will discourage banks and other firms from lending too much in good times. But without an international consensus on the issue, banks in other coun- tries could end up free of such constraints. In recent weeks, there also has


been growing concern that China and some other fast-growing Asian economies are keeping their currencies from rising and running large trade surpluses. U.S. lawmakers have increased pressure on China over the issue. Dallara said China’s growing


trade surplus could become so destabilizing for the world econo- my that the richest nations should meet to negotiate a deal to resolve the problem. In the 1980s, a session among Japan,Germany, the United States and Britain produced an agreement over cur- rency values. World Bank President Robert


B. Zoellick, in a news conference ahead of the bank’s annual meet- ing, said the concern about cur- rencies is becoming far broader than a bilateral dispute between the United States and China. “I don’t foresee that we are


GETTING THE REPRESENTATION OVER


300 MILLION RESIDENTS THEY DESERVE.


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moving into an era of currency war, but there are clearly going to be tensions if countries are prop- ping up and intervening to keep their currencies at lower rates,” Zoellick said. “Given the fragility of this recovery, it is important to manage any of the downside risks — be they trade protectionism or currency.”


schneiderh@washpost.com


President is challenged on tax proposal


BY MARK S. SMITH Intending to talk about colleg-


es and worker training, President Obama on Monday suddenly found himself in a spirited elec- tion-year debate with a business advisory group about whose tax cuts should be extended and for how long. At a meeting of the President’s


Economic Recovery Advisory Board,HarvardUniversity econo- mist Martin Feldstein pressed Obama to keep all the Bush-era tax cuts, not just the middle-class cuts the president wants to ex- tend. “That would give a boost to


confidence,” Feldstein declared. Security and Exchange Commis- sion Chairman William Donald- son added that an extension would allay business and con- sumer uncertainty. Obama replied that his stand


would benefit 98 percent of American taxpayers. “You’d think [that] would provide some level of certainty,” he said. Obama also reiterated his view


that breaks for top-income tax brackets would do little to boost the recovery, because the wealthy are not holding off buying flat- screen TVs and other big-ticket purchases for lack of a tax cut. Plus, he said, those cuts are unaf- fordable. “If we were going to spend


$700 billion, it seems it would be wiser having that $700 billion going to folks who would spend that money right away,” he said. Obama dismissed the notion


that the well-off — he included himself—would simply “take our ball and go home” if they did not continue to get a big tax cut. Former Federal Reserve chair-


©2010 Lockheed Martin Corporation


man Paul Volcker, who heads the advisory group, backed up Obama. “I want to assure you that my psychology will not be affect- ed,” he declared amid laughter. Congressional Democratic


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leaders have postponed a vote on tax cut extensions until after the November election, but Obama has accused Republicans of hold- ing middle-class cuts “hostage” by demanding top-end cuts, too. Penny Pritzker, a real estate


executive and longtime Demo- cratic fundraiser who serves on the board, said panel members were discussing whether they should take a formal position on the issue. Much of the hour-plus meeting


lockheedmartin.com/how


was devoted to an administration initiative “Skills for America’s Fu- ture, that would expand partner- ships betweentopU.S. companies and community colleges. It was announced on the eve of a White Housesummitoncommunitycol- leges, which is being led by com- munity college teacher Jill Biden, Vice President Biden’s wife. Gap Inc., McDonald’s, Accenture and other big-name companies have announced their backing. —Associated Press


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