G-20 Hangover
Research for Online Investors

by John Dalt

6/28/10

The G20 summit in Toronto came to a close with no agreement on the financial tax we discussed in G-20 Summit Goals last Thursday.  Press reports are covering the news as a tax on banks, but it was much more than that.  The “big picture” goal was to tax every financial transaction down to, and including, individual investor's stock or bond purchases.  Individual investors should give thanks to Canada, Australia, Japan and Brazil for standing in the way of this freight train.  Where was the U.S.?  Shoveling coal.

Reuters labeled the G20 non-binding pledge to cuts deficits in half by 2013 as a setback for President Obama.  The U.S. had pressed European governments to continue economic stimulus in the weeks leading up to the summit.

Leaders also held back on endorsing new bank capital requirements. The New York Times covers the story in At Summit, Banks Avoid New Global Regulations. U.S. Treasury Secretary Tim Geithner explained the reason for world banking standards, “In these markets today, risk can move very quickly to evade the strongest standards, and we think the system will be stronger as a whole if these measures in the U.S. we’re about to enact are complemented by strong actions by other countries.”

The standards are part of the “Basel proposals.”  The Basel Committee sets banking standards that are then put in to effect by governments and financial regulatory agencies.  The Basel Committee wants to tighten requirements on what can be labeled Tier One capital.  This is capital of highest quality and liquidity, allowing a bank to withstand a downturn in the economy.

The world’s leading bank industry group, The Institute of International Finance, warned that the Basel proposals would reduce economic growth three percent through 2015 in the U.S., Japan and eurozone countries. Mario Draghi, the Chairman of the Financial Stability Board, said it would be better to delay the proposals rather than weakening the standards.

Popular sentiment is the G20 wants to implement the new standards by 2012.  Karen Petrou of Federal Financial Analytics believes new rules are coming.  “In the U.S., the rules will be very stringent, but that’s because of the bill Congress passed Friday.”

Obama may have lost the argument to continue spending money by other governments.  Geithner lost the argument to increase regulations on banks.  The U.S. congress conference committee has cleared our own regulatory bill to increase regulation on U.S. based banks.

Geithner’s words haunt us, “In these markets today, risk can move very quickly to evade the strongest standards, and we think the system will be stronger as a whole if these measures in the U.S. we’re about to enact are complemented by strong actions by other countries.”

Stronger world-wide financial standards, more stimulus spending, and a financial transaction tax were rejected by world leaders. The U.S. is going it alone, at our peril. Continued deficit spending will lead to inflation and higher interest rates. Tighter bank regulation changes the competitive equation. Banks can move. Capital goes where it is welcome. There is one side note to the politics of the financial regulation bill in congress. Senator Robert Byrd of W. Virginia died Monday morning. He was the reliable 59th vote for the democrats. His death may slow down some majority backed bills until a replacement is named and seated.

Financial stocks rallied Friday on settlement of the final bill.  Markets don’t like uncertainty, but be careful, the U.S. is not an island.  We cannot restrict our companies more than others, without paying a price in higher domestic cost of operations or loss of competitiveness.

Editors note:  Check out my new face book page for John Dalt.

To the mailbag:  On Big Boys, Little Guys….Thanks for the explanation. ----subscriber F.C.

You have to stop cloaking yourself with 19th century solutions for 21st century complexities. People are imperfect and a surprising number are so thoroughly selfish they can't help putting their own interests above the greater good. ---subscriber J.R.

John’s reply: I guess I am imperfect, I like to eat. I know there are hungry people, but I still like to eat. I am reminded of the old saying out in the country, “Don’t cuss the farmer with your mouth full.” Similarly, “Don’t destroy free markets if you enjoy success.” Free markets allow people to succeed and fail, whether they cheat or compete honestly. Regulation restricts free markets, and never catches the cheaters until it is too late. You take the bad to get the good. Please view Milton Friedman explaining capitalism and free markets.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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