Bush Plans Summit For Rethinking Capitalism's Contours

[Mrs. Sharon B. Hodge]

Summits Will Address Financial Crisis, but Divide Looms Between U.S. and EU

WASHINGTON -- A planned international summit on the financial crisis is turning into a debate over the future shape of capitalism, with European leaders favoring greater international oversight of markets, and U.S. officials preferring the current model of national regulation.

U.S. President George W. Bush, French President Nicolas Sarkozy -- the current head of the European Union -- and European Commission President José Manuel Barroso said Saturday that they would begin putting together a series of summits to address the long-term challenges facing the global economy.

At their meeting at Camp David in Maryland on Saturday, Mr. Sarkozy repeated his call for a new global financial order. "This is a world-wide crisis and therefore we must find a world-wide solution," he said. The answer "will be all the more effective insofar as we find it together, we speak with one and the same voice, and we build together the capitalism of the future."

Mr. Bush, in his comments, emphasized the importance of improving individual countries' regulatory systems as a way to prevent a repeat of the current financial crisis.

"Together, we will work to strengthen and modernize our nations' financial systems, so we can help ensure that this crisis doesn't happen again," he said.

Mr. Bush also warned against undermining free enterprise. "As we make the regulatory and institutional changes necessary to avoid a repeat of this crisis, it is essential that we preserve the foundations of democratic capitalism, a commitment to free markets, free enterprise and free trade."

The debate is likely to continue into the next U.S. administration.

Adam Posen, deputy director of the Peterson Institute for International Economics, said many U.S. policy makers and officials, including advisers to Democratic presidential nominee Sen. Barack Obama, feel that "each country has to have its own tailored solutions, that international goals don't work."

Representatives for both the Obama and McCain campaigns couldn't be reached for comment.

Other experts said significant concessions by the U.S. are all but inevitable. "The landscape's changed," said Kenneth Rogoff, a Harvard University professor. "I think we'll see a big turn in the U.S. position...We certainly would prefer that market principles have an important bearing [on policy]. But I don't think we can blow them [European officials] off as we might have a year ago."

Bush aides said Sunday that the current administration views a global regulatory system as a potential threat to competition among nations. That, in turn, could weaken the advantage the U.S. typically has enjoyed in many sectors over more-regulated European rivals in attracting investment. U.S. officials worry, for example, that an international super-regulator could seek restrictions on capital flows between countries and slow down the global move to increase free trade.

Administration officials also question whether a global regulator could regulate more efficiently than national ones. "It's hard to imagine a super-regulator providing more oversight and supervision than German banking regulators, and yet they were surprised by the failure of their banks," said a senior Bush administration official. "Being smarter and better doesn't require a global finance cop."

Mr. Sarkozy on Saturday laid out several areas where he thinks international oversight is needed. These included not just major banks but also hedge funds and other lightly regulated investment vehicles, as well as tax havens.

"Hedge funds cannot continue operating as they have in the past; tax havens, neither; financial institutions that are under no supervisory control -- this is no longer acceptable, this is no longer possible," he said.

European leaders have also called for tougher oversight of executive compensation at the international level, as well as of derivatives. They have been especially concerned about U.S. oversight in these areas.

European officials also worry about the risks of the U.S. continuing to continue to occupy its top position in the global financial order, given the potential volatility in its financial system.

Bush administration officials say derivatives have in many instances helped reduce financial risk.

In addition, "if we limit the global economic system to low-risk and low-reward [investments], then that's likely what we'll get," the administration official said. "You want risk-taking...and occasional failures because that's where you get the best innovation and leaps forward."

Write to John D. McKinnon at [e-mail]