The New Republic

It's that time again--the G8 ministers of finance get together for another face-to-face conversation, this time in Italy over the coming weekend. (Aside: the central organization at work is actually the G7, but the Russians get to join when the ministerial meeting is ahead of the annual G8 heads of government meeting).

The G7, which first convened in the 1970s to guide the global economy after the breakup of the Bretton Woods fixed exchange rate system, seems increasingly irrelevant (and adding Russia, after the collapse of communism, added little). But anachronisms are rarely abolished in the field of international diplomacy; more often, they are eventually absorbed into something else. And the G20, which was originally a liaison event between rich countries and "emerging markets," is still young at the heads of government level, with one flop of a meeting (November 2008) and one resounding success (April 2009) to date--so abandoning the G7/G8 might be premature.

But what should we hope for from this weekend's G8?

Well, the Americans and continental Europeans are still at odds over appropriate economic policies, with the Germans increasingly taking a negative tone--all their past and future problems, apparently, can be laid at the feet of Ben Bernanke. And the April G20 summit's crude truce on macro policies--the U.S. and China do discretionary fiscal stimulus, Europe and everyone else not so much--is unlikely to change anytime soon.

The real meat on the table should be financial sector reform, but this agenda looks flimsy. Remember that if there were genuine progress for the ministers to discuss, their deputies would have already worked out almost everything and we'd have interesting selective leaks by now. The operating principle remains: If ministers of large countries pose for photographs and look cordial, media attention is drawn to the appearance of unity. It is not that difficult to arrange for the front page, major headlines, and even the blogging news cycle to be dominated by: "We agree on [fill in the blank meaningless technocratic reform]."

Financial sector reform is too important for these kinds of hijinks. Think of it this way: The main effect of the 2002 Sarbanes-Oxley Act was to convince people that corporate governance and compliance issues were being addressed, at the same time as the most blatantly unethical behavior was rampant across the financial sector and more broadly. The legislation let people at all levels punt on the lack of broader national and company level leadership--have you noticed anyone taking responsibility for anything to do with our most recent global crisis yet?

Instead, what we have in effect now is a "policy seesaw"--push down on bad behavior in one place and problems emerge in others. People in the banking industry, and elsewhere, are paid a lot of money to lobby against or find ways around regulations. And the regulation reforms in the pipeline for the U.S. are beginning to look borderline meaningless; Noam Scheiber has an articulate position on this point.

What should be done to reform the financial sector? Executive pay and other compensation at big banks should be capped. This is a crude measure, but would work--the talent would migrate to smaller outfits, and probably to firms that are small enough to fail (i.e., when they fail, you don't feel obliged to bail them out).

Will we do it? Not at this ministerial meeting or the G8 summer summit; the U.S. Treasury is opposed and the Europeans are stuck in treacle. The next great hope at the level of international meetings is September's G20 summit in Pittsburgh, or perhaps the IMF meetings in Istanbul--but, to be honest, unless there is another major bank failure, don't hold your breath.

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