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US ups ante on regulation, Obama calls for G20 action

Published on 25/03/2009

Washington -- The US government and central bank on Tuesday upped the ante on reform of the stricken financial system, calling for tighter regulation to prevent a repeat of the worst economic crisis in decades.

Ahead of a key Group of 20 meeting next month, Treasury Secretary Timothy Geithner said the Obama administration and Congress had to work together to enact "comprehensive regulatory reform and eliminate gaps in supervision.”

"All institutions and markets that could pose systemic risk will be subject to strong oversight, including appropriate constraints on risk taking," Geithner told a Congressional committee.

He said the regulatory system could not prevent the build up of "dangerous levels of risk" and cited salary practices that had encouraged "risk-taking and rewarded short-term profits over long-term financial stability."

Federal Reserve chairman Ben Bernanke stressed the "urgent need for new resolution procedures for systemically important non-bank financial firms."

European leaders, especially France and Germany, blame lax regulation for the financial crisis that has brought the global economy to its knees and want the G20 meeting in London to take on major reforms to tackle abuses.

Washington has been pressing governments to spend whatever it takes to get their economies moving again but on Tuesday President Barack Obama identified regulatory reform as essential too.

Calling for G20 leaders to agree a strategy to kickstart the global economy, Obama said "we are living through a time of global economic challenges that cannot be met by half measures or the isolated efforts of any nation."

G20 leaders "have a responsibility to take bold, comprehensive and coordinated action that not only jump-starts recovery but also launches a new era of economic engagement to prevent a crisis like this from ever happening again," he wrote in the International Herald Tribune. "If we continue to let financial institutions around the world act recklessly and irresponsibly, we will remain trapped in a cycle of bubble and bust."

The emphasis on regulation followed Geithner’s announcement Monday of a plan that offers government incentives for private investors to buy up to a trillion dollars of tainted assets from the banks.

The plan, largely welcomed, sparked a sharp rally on global stock markets Monday, with Wall Street posting its fifth largest percentage gain ever.

Wall Street was lower on Tuesday, however, as investors took quick profits, with Dow Jones Industrial Average down 1.08 percent at around 1510 GMT.

Patrick O’Hare at Briefing.com said it was normal "to book some profits" but any declines from here "will be marked by an inclination to buy on the dip rather than be seen as a relentless march to retest prior lows."

Europe was also hit by profit-taking, with London down 1.53 percent, Paris off 0.23 percent and Frankfurt 0.15 percent lower.

Asian markets were higher on Tuesday, with Tokyo up 3.32 percent as Hong Kong gained 3.44 percent and Sydney rose 0.84 percent.

The wider stakes involved in the crisis were highlighted Tuesday when China’s central bank called for the dollar to be replaced as the international reserve currency in the interest of global stability.

People’s Bank of China Governor Zhou Xiaochuan said he wanted to replace the dollar, installed as the reserve currency after World War II, with the Special Drawing Rights used by the International Monetary Fund (IMF).

China has the world’s largest forex reserves at nearly two trillion dollars, with well over a third of that placed in US Treasury bonds, and has voiced increasing concern over the safety of its US investment.

Meanwhile, the euro zone’s purchasing managers’ index (PMI), compiled by data and research group Markit, rose to 37.6 points from 36.2 points in February and bolstered hopes the crisis might be bottoming out.

Economist Marco Valli at Italian bank Unicredit said the PMI survey might just mark a trough in the cycle although the risks were high that worse may still come.

Said Valli: "The March figures signal that momentum has ‘improved’ somewhat at the end of the first quarter but in the coming months we need to see … a more convincing upward" trend.