The Battle of Pittsburgh

Behind the pretty moral lessons, rest assured: the laws of market economy endure! The meeting of the G20 finance ministers in London on Friday and Saturday confirmed as much, hinting that, behind the facade of consensus, the battle will rage at the end of the month when the heads of state appear on the scene.

A year after the failure of Lehman Brothers, nothing fundamental has changed in the activities of the financial sector. Of course, life is a little tougher now in capitalist paradises, but the United States and United Kingdom firmly intend to exercise their leadership role in world finance. While continental Europe focuses on the symptomatic but secondary problem of traders’ bonuses, trying to leverage public indignation, America is making moves toward the real questions, and not even bothering to hide it.

So Treasury Secretary Timothy Geithner only paid lip service to the idea of studying the principle of “limitations” on variable compensation for market traders. On the other hand, he put pressure on the European camp, by proposing new, higher equity requirements for banks, which put France and Germany at a disadvantage. For America, the issue of bonuses is cultural. It is at the very heart of the capitalist system, i.e. the quest for profit. For the princes of Wall Street, it is out of the question to set a limit on “earning more.”

The scene for what will be the Battle of Pittsburgh is already set: By polarizing the debates over the question of compensation, France wants to impose a change in the behavior and practices of financial players. The United States, more pragmatic, wants to act at the source of the problem, setting limits on the banks such that they cannot take the same major risks as before without prohibitive capital costs. This American counter-proposal is clever. But it is also a veritable attack on European banks. Continental Europe’s banks have not taken as much advantage as their American counterparts have of the financial crisis to beef up their capital funds under the umbrella of government aid. Nor have they been “whitewashed” by the publication of “stress tests” to reassure the public of their financial stability.

That is what provoked French Finance Minister Christine Lagarde’s sharp reaction. She countered that all that American banks need to do is respect the best-practice standards, known as Basel II, which are more than sufficient in her opinion. Under cover of reforming capitalism, the issue at the G20 summit is also competition between financial markets.