Did The G20 Ignore The Toxic Asset Issue?

According to a statement by British Prime Minister Gordon Brown, the G20 has agreed to boost funding to international institutions combating the global economic downturn — particularly the IMF — and to put an end to tax havens that don’t provide information to foreign tax authorities on request.

However, one item that the G20 didn’t seem to address is what to do about the toxic assets plaguing banks around the world. While this is undeniably a problem that began in the US, it is now shared by many European nations. As of now, only the US, UK, Germany and Switzerland have suggested plans for dealing with the assets, while the rest of Europe basically dithers. The G20 reportedly came to an agreement on “principles” regarding troubled assets, but little else.

Yesterday, International Monetary Fund managing director Dominique Strauss-Kahn challenged the G20 to step up to the plate on the toxic asset issue, saying that the fund’s experience suggested “that you never recover before the cleaning up of the banking sector has been done. The US . . . is rightly insisting on stimulus and the EU rightly insisting on regulation. They are not yet moving quickly enough in doing the cleaning up of the financial system.”

So what’s the problem? As Gillian Tett wrote in Financial Times, it could be that no one has worked out a good system for cleaning up the baks:

One dirty secret that hangs over Thursday’s meeting is that there is still precious little global consensus about how to tackle the toxic woes. Some countries (such as the US) are trying to persuade banks to sell their bad assets; others (such as the UK) are trying to “insure” the banks against losses instead. Meanwhile, several governments in continental Europe seem to be just holding their breath –- and praying that the problem will magically disappear.

Tett added that “this reluctance to debate the issue reflects a desperate attempt to avoid telling taxpayers how much it might really cost to remove the toxic rot.” There has also been a lot of noise made about the supposed disconnect between President Barack Obama’s desire for global stimulus and Europe’s wish for tightening financial regulation, so perhaps eschewing talk of toxic assets was an attempt to avoid further displays of disunity.

But whatever the reason, toxic assets are not simply going to disappear on their own, and everyone needs to get the ball rolling on cleaning them up. If Europe is so concerned with making sure financial institutions are regulated, then it should also be interested in ensuring that we have a functional banking system going forward. As for the US, global stimulus is great, but its not going to do much good if the banks are frozen. It’s in everyone’s interest to solve this problem, and no one benefits from continued inaction.