Historic G-20 Summit Focuses on Policy Responses for Combating the Global Recession and Financial Market Crisis

• First, with respect to the global recession, there was common agreement to pursue stimulative monetary and fiscal policies, where appropriate.
• Second, with respect to the financial crisis, there was consensus to do what is necessary to stabilize the financial system, provide sufficient liquidity, bolster capital positions, and unfreeze the credit markets. In addition, there was agreement to expand the role of the International Monetary Fund and other multilateral agencies in supporting emerging countries that have been affected by the crisis.
• Third, there was agreement on common principles for financial market reform, as well as immediate action in several key areas, including disclosure standards for off-balance sheet activity, more integrity in credit-rating processes, stiffened capital requirements for structured credit and securitization, better risk-management practices, and coordinated supervision of global institutions.

The timing of the G-20 summit was fortuitous in one major respect—there is incontrovertible evidence not only that the major industrialized countries are locked in the grip of a major recession, but the recession has now been raging for at least 7–8 months, and perhaps longer.

The G-20 meeting represents an important milestone, and potentially a new way forward for international policy collaboration not seen since the 1985 Plaza Accord, the 1971 Smithsonian Agreement (which dealt with issues related to exchange-rate fluctuations), or the Bretton Woods conference in 1944. The presence of China, India, and Brazil at the meeting represents an important breakthrough for advanced developing countries, and those countries have the resources and capability of contributing to a reversal of the global business down-cycle.

Prompt counter-cyclical policy action is high on the list of action items, and monetary policy is clearly best positioned to lead the charge. We have seen accelerated interest rate reductions in the United States, the United Kingdom, and Australia.

As global deflationary forces continue to escalate, other major central banks need to step harder on the monetary-easing accelerator, and not necessarily be handcuffed to a preset meeting schedule. Indeed, the expectant period immediately after the G-20 meeting is an ideal window for some central banks to get back on the curve, under the umbrella of another coordinated round of interest-rate reductions.