The Journal reports that Angela Merkel and Nicolas Sarkozy have been pretty adamant about financial regulation at the G-20 summit:
We do not want results that have no impact in practice," said Ms. Merkel. "Germany and France will speak with one and the same voice," Mr. Sarkozy added, citing an on-and-off political alliance that has previously pitted the two countries against the U.S. or the U.K. over Europe's direction. "As the chancellor rightly said, we demand results," he said. "Regulation is not simply a word, an empty word... It is a major objective."
Of the U.S. president, he said, "Mr. Obama was elected on change. We trust him. But we're talking about today and tomorrow....After tomorrow will be too late."
So Friday will be too late for regulation? Really?
Don't get me wrong, I'm all in favor of tougher financial regulation. But the Merkel-Sarkozy position makes no sense. For example, according to the Journal, one of Sarkozy's proposals is to make "banks retain some of the loans that they bundle into securities and sell to investors in a process known as securitization," which would presumably make banks a little more careful about who they loan money to. Great idea in principle. Except that the problem we're facing now isn't that banks are furiously extending loans to people who can't repay them, then turning around and offloading them to investors. The problem we're facing is that banks aren't even making loans to credit-worthy borrowers. At best, Sarkozy's proposal could stand to wait several months. At worst, it could restrict credit at a time when we want to expand it. (The specific consequences would obviously depend on the details).
Meanwhile, fiscal stimulus--Obama's top priority--looks pretty damn urgent at a time when most of the world's economies are contracting and facing huge output gaps.
Somehow the French-German line (would that be the Maginot Line?) feels like it's more about sticking it to America--or, at the very least, about domestic politics in France and Germany--than solving the financial crisis.
Update: The Journal has more on this theme in a piece today about how international bank regulators have reached agreement on raising capital requirements for banks. Key graf:
The OCC's Mr. Dugan said U.S. and foreign regulators have agreed that no major changes to capital requirements will take place until after the financial crisis subsides, because it's difficult for major banks to raise capital in this environment.
Also, this is interesting--and raises additional questions about the motives of Sarkozy and Merkel:
Federal Deposit Insurance Corp. Chairman Sheila Bair pushed for an international leverage ratio a few years ago but made little progress with skeptical foreign officials. The financial crisis has breathed new life into the idea. Canadian officials have pushed aggressively for it, too.
Obviously it would be useful to know which foreign governments were opposed...
--Noam Scheiber