FINANCE & ECONOMICS

Spin and substance
Apr 8th 2009 From The Economist

What the G20 did and did not achieve

IT WAS not Bretton Woods. The G20 meeting in London did not redesign the architecture of the financial system. Nor did it tame the wild beasts of Anglo-Saxon capitalism, as the French and Germans wanted it to. It did, however, overlay a mixed bag of reforms with some good British spin.

The problem the world leaders faced was that they were grappling with subjects that had little resonance with most recession-struck voters. Terms like “counter-cyclical capital” and “macro-prudential regulation” may trip easily off Gordon Brown’s tongue, but do not make tabloid headlines. So the British prime minister had to apply his well-known creative accounting and conjure up, in agreement with his “Gang of 20” colleagues, a boost of $1.1 trillion for the global economy.

It rescued the summit from disaster. But was there any substance to the reforms that the headline-writers shied away from? First, counter-cyclical capital. This is an updated version of Joseph’s biblical injunction to store the harvest in fat years to prepare for the lean ones; banks should build up more capital in booms (when it is easy to raise) in order to prepare for a bust. Good in theory, but in practice, banks will do their utmost to evade it. It will mean, over the cycle, that they will have more capital on average and thus lower profits. Limits on the levels of debt they can carry will have the same effect. These provisions will probably do more to cap bankers’ bonuses than any attempt to control pay though governance codes or explicit regulation. But the real test of contra-cyclicality will only come at the peak of the next boom, and that is years away.

The same is true of macro-prudential regulation, the idea that a group of wise men can focus on systemic risk, rather than get bogged down in the details of individual firms’ finances. In theory, such a council of wisdom would have spotted that the American housing boom was causing banks to become overexposed to the finances of subprime borrowers.

The creation of this global watchdog has required the Financial Stability Forum to be transformed into, wait for it, the Financial Stability Board. The FSF was associated with the unrepresentative G7; the FSB will represent the whole G20. That it shares the initials of the Russian secret service might be an attempt to make it a bit more scary. It needs to be.
Collaborating with the IMF, it is meant to ferret out macroeconomic and financial risks. But if it warns, who will listen? Imagine the scene in Congress in 2015. The economy is booming, but Americans cannot get mortgages because some pen-pusher in Basel says the banks are taking too much risk. The banks would be freed faster than you can say “swing voter”.

Even at the national level, macro-prudential regulation is hard. First, regulators tend to be captured by the industry. Second, the seeds of disaster are sown when all looks well; the economy is booming and banks have healthy profits. It takes an iron will to be contrarian at such times.
How about hedge funds? Regulation and oversight will be extended to those that are “systemically important”, a definition that leaves plenty of leeway. Which funds are systemically important becomes clear only when they fail. If American hedge funds are required to register with the Securities and Exchange Commission, this will hardly cause a mass exodus from Connecticut; British managers have coped with being regulated by the Financial Services Authority. Most funds will be far more concerned about the reactions of their clients, who have been disappointed by negative returns and the inability to withdraw their money, than a G20-inspired crackdown.

Then there is the toxic-asset plan. The G20 communiqué is quite clear: international bodies should aim for “full and transparent disclosure of the impairment of banks’ balance-sheets”. Meanwhile, any asset-purchase scheme, such as America’s Public Private Investment Programme, should transfer risk to taxpayers “at a fair price”.

Hard to square that, however, with the decision of America’s Financial Accounting Standards Board, announced as the G20 met, to give banks more flexibility in valuing assets. If banks can choose between keeping the assets on their balance-sheets, at a value of their choosing, and selling them to governments, written down to a fair price, it is not difficult to imagine which they will pick.

In sum, the G20 regulatory changes call to mind Dr Johnson’s opinion of a manuscript as both good and original. The G20 scheme is both good and timely, but the bits that are timely are not good and those that are good are not timely.

FAMOUS QUOTATIONS

“It is better to know some of the questions than all of the answers” (James Thurber)

GRAMMAR POINT

SPEAK AND TALK

There is not very much difference between speak and talk. In certain situations one or the other is preferred (though they are usually both possible)

Talk is the more usual word to refer to conversational exchanges and informal communications...

When she walked into the room everybody stopped talking.
Could I talk to you about your results ?

Speak is often used for one-way communication and for exchanges in more serious or formal situations...

I´ll have to speak to that boy – he´s getting very lazy
They had a terrible row last week, and now they´re not speaking to one another
After she had finished reading the letter, nobody spoke

Talk is often used for the act of giving an informal lecture (a talk); speak is preferred for more formal lectures...

This is Mr Brown, who´s going to talk to us about travelling around Asia
This is Professor Smith , who is going to speak to us on recent developments in low-temperature physics
The Pope spoke to the crowd for seventy minutes about world peace

Speak is the usual word to refer to knowledge and use of languages, and to the physical ability to speak...

She speaks three languages fluently
We spoke Spanish so that the children wouldn´t understand
His throat operation has left him unable to speak

We usually ask to speak to somebody on the phone (US also speak with)...

Hello. Could I speak to David, please ?

PUZZLE

Anthony and Cleopatra are lying dead on the floor of an Egyptian villa. Their bodies are unmarked and they have not been poisoned. There is a broken bowl lying nearby. How did they die ?

CURRENT AFFAIRS

EDUCATION - Is five too soon to start school?

Do children start school at too young an age in England? Is childhood freedom being curtailed too soon?

Compared to most other western European countries, English pupils are extremely early starters in the classroom. While compulsory education begins in England at the age of five (with many children actually starting at four), in countries such as Sweden, Denmark and Finland, school doesn't begin until the age of seven. English children are ploughing through a fixed curriculum while their continental counterparts are still ploughing up the kindergarten sandpit or playing at home.

But which system delivers the best results?

The young ones

This far-reaching question has been raised by the Cambridge-based Primary Review which is scrutinising how primary education is organised. And its conclusion challenges the idea that an early start has long-term advantages. "The assumption that an early starting age is beneficial for children's later attainment is not well supported in the research and therefore remains open to question," says the report.

COMPULSORY SCHOOL AGE
· Five years old : England, Scotland, Wales, Malta, the Netherlands
· Six years old : Austria, Belgium, Czech Republic, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Norway, Portugal, Spain
· Seven years old : Denmark, Estonia, Finland, Latvia, Lithuania, Sweden, Poland

Source: NFER/ Eurydice

So why do English schoolchildren start at five, when almost everyone else in Europe starts later?

Apart from the Netherlands and Malta, the only other education systems beginning at five are Scotland and Wales (with Northern Ireland even earlier at four). The origin of such an early start, introduced in 1870, had little to do with education, says the Primary Review report.
Entering full-time education at such a tender age meant reducing the malign influence of Victorian feckless parents - it was about child protection and social conditioning rather than learning. And it was an attempt to appease suspicious employers, who were worried that starting any later would remove their supply of juvenile workers. An early start meant an early school leaving age.

Long hours culture

The result remains with us - and as a consequence one of the most distinctive characteristics of English schoolchildren is how little time they spend with their family. Children are full time in school up to three years earlier than in Scandinavia - and the summer holidays in England and Wales are shorter than anywhere else in the European Union. And the pressure on schools is now to become "extended schools" which would create an even longer day, with optional activities before and after school hours. But this is far from straightforward territory. If children were not in school, what would be the impact on working parents? Long hours in childcare are already a reality for many pre-school children. Last year's teachers' conferences heard concerns that children were spending so little time with their own families that they were showing signs of aggression and de-socialisation, taking their behaviour from their peer group rather than absent adult role models.

Less is more?

But what does it mean for education standards?
One of the most intriguing statistics from international comparisons is the lack of relationship between hours in the classroom and educational achievement. Finland, a global superstar in education terms, is consistently among the top performers. But it is also at the very bottom of the league in terms of the hours spent in the classroom. Finnish pupils start formal education at seven and then enjoy 11-week summer holidays - and they end up with the highest educational standards in Europe. Poland, a rapid-climber in international education league tables and overtaking England at reading skills, is also another country where pupils do not start until the age of seven. There is another egalitarian argument for starting school early. Pupils from poorer homes, with parents who are less able to help their learning, might be held behind if they didn't start lessons until six or seven.

Level playing field

But a rather sobering set of statistics published by the government earlier this year showed that the length of time spent in school does little to level the playing field. When pupils start school at five, the children of more affluent families are already ahead. But this "attainment gap", instead of closing gets wider at each stage up to the age of 16. As every year passes in school, the results of the richest and poorest grow further apart. There have been some other cross-winds of concern about children starting school before they are ready. The government has highlighted summer-born children, whose parents could now be given the right to delay entry by a year.
It followed research showing that the disadvantage of being the youngest in a year group persisted right through primary and secondary school. While 60.7% of September-born girls achieved five good GCSEs, only 55.2% of August-born girls achieved the same. The Primary Review, taking an overview of the evidence, suggests that there is no clear link between quantity and quality in education. Or put another way, the early bird doesn't necessarily become the bookworm.