It’s that time of year when senior politicians feel moved to save the world again. After long summer breaks, the Finance Ministers of the G20 meet today in London, to catch up on the promises of the last G20 summit which they have not yet fulfilled, and to consider what next should preoccupy them.
The headlines are going to the vexed subject of bankers bonuses. Unfinished business from last time, there is now an attempt to cobble together some regulatory answer. The Finance Ministers missed their best chance of having real influence over pay and rations in banks. When they were distributing huge largesse last autumn to prop up banks thought to be in danger they could have written what terms they liked. Today, with the apparent crisis receding, it is not so easy. Given the divide between the US and the European positions, we may end up with more strong words on the need for restraint. There could be some attempt at a regulatory answer in the EU in the form of a requirement that some elements of a performance bonus should be delayed in payment. They will look long and hard at guaranteed bonuses. Any attempt to ban those would migrate such payments to other types of hiring fee for new staff, which is where the guaranteed bonus is most common.
What we need the Finance Ministers to do is to look ahead more than they look backwards to the last crisis. Markets have been powering upwards on the back of easy money and low interest rates, supercharged by quantitative easing in the US and UK. Investors need more guidance on when things will be returned to more normal policies. In the UK government bond prices are mainly determined by the Bank of England’s purchase policy. What will happen to them when that ends? Where will short-term interest rates go, when quantitative easing is over?
I read that some of the summiteers are nervous about making any public pronouncements on ending the special measures, for fear of tipping economies back into recession. Such briefing can be self-defeating, as it implies a lack of confidence itself. Market participants are canny. They know that the current extraordinary measures cannot continue indefinitely. It would help to put them out of their uncertainty by having a sensible plan to get back to more normal official rates and to end quantitative easing. One member of the MPC is now saying that official interest rates in the UK have to go up. He is the one realist.
We have sold some US shares. The market there has done well in recent weeks, and yields are now quite low. Both the US and the UK face a difficult time when their governments recognise that large public deficits and borrowing programmes are no more affordable than the large private sector ones turned out to be.