The G20 was a pretty listless affair (unlike the concurrent Bloomfontein debacle), with world leaders opting to go their own way, the deficit hawks in the ascendant, and no significant change agreed at all.   International settlement of the world’s most pressing problems is becoming ever weaker – nothing relevant decided at Copenhagen on climate change, nor on the Doha round of trade talks, nor at Basel III on capital reserves for the banks.   Now   Toronto adds to the vacuous list of politicos’ photo opportunities.

The obvious reason of course is self-interest.   The US where recovery is stalling is cautious about belt-tightening, Europe and especially UK  and Germany emphasise the risk of sovereign debt crisis more than a double-dip recession, while Asia whose banks were more resilient carp at paying any  bank levy because other countries’ banks were reckless.   But there is another aspect to this too which is more disturbing. The financial markets, for all their roguish behaviour, continue to drive world events, including governments, almost entirely unregulated.   Their demands for monetary laxity and excessive leveraging which precipitated the credit and housing asset bubbles which inevitably crashed.   Their demands for deregulation and privatisation which led to the uncontrolled ballooning of toxic derivatives brought down the system.   They then demanded gargantuan bail-outs because they were too big and too important to fail.

Then when the bail-outs succeeded in pulling them back from the abyss so that they could resume full-scale lending to the real economy, they gave first preference despite exhortations from governments to building up their own balance sheets, their own profits and their own bonuses in utter disregard of the desperate need for much higher liquidity in the economy.   And now they have strenously, and successfully, resisted having to quadruple their core tier 1 capital ratios so that reckless over-lending doesn’t bring down the whole system again.

Who is running the world, governments or markets?    And more importantly, who should be running the world when market sentiment often oscillates wildly and markets frequently don’t even know what they want (apart from their own short-term self-interest)?   Indeed at this very juncture they are torn between austerity and growth.    Governments, anxious to placate temperamental market instincts, are equally confused as we have just witnessed at the G20.

The lesson of all this is that the world simply cannot afford to continue giving paramountcy to the financial markets.   Any override they are given they will sooner or later, and in the present critical cusp for the world economy probably sooner, abuse.   The real meaning of the G20 fiasco and the excessive timidity of governments is that we await a second and bigger financial crash before genuine and lasting reform has to be imposed, even by feeble governments, on out-of-control markets.

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