Brazil's president called on Saturday for an overhaul of the global finance system which "collapsed like a house of cards" in the credit crisis and demanded a seat at the top table for emerging economies. In the United States, President-elect Barack Obama said it was time for Americans to put aside their political differences to focus on the crisis, which he would tackle as soon as he moves into the White House in January.
The world's most powerful central bankers began discussions on how to address the threat of a global recession at a meeting in Brazil's business capital of Sao Paulo. Brazilian President Luiz Inacio Lula da Silva, a former trade union leader, warned that millions of people risked losing their jobs, causing an increase in poverty in many emerging economies that would be the fault of rich countries.
"This crisis began in the advanced economies," Lula told the finance officials. "This is the consequence of the blind belief in the ability of self-regulation of the markets, and to a large degree, the lack of control over financial players."
On Friday, the "BRIC" nations of Brazil, Russia, India and China for the first time forged a joint position that called for reform of institutions like the International Monetary Fund to reflect the growing importance of developing economies. Countries such as export giant China and the oil-rich Gulf states have amassed trillions of dollars in reserves that could help the IMF support smaller countries withstand the turmoil that has rocked financial markets and their currencies.
Lula, long a critic of the dominance of the United States and other developed economies in the way decisions on global finance are taken, said there was wide acceptance that the elite G7 countries were no longer capable of working alone. "We need new, more inclusive governance," he said. "It is time for a pact between governments to build a new financial architecture for the world."
Brazil is hosting an annual meeting of finance officials of the G20 group of the world's biggest advanced and developing economies. They are trying to prepare for an emergency summit of world leaders next weekend in Washington on the crisis. But the chance of major reform proposals appear slim, not least because the outgoing administration of US President George W. Bush has played down the need for big reforms.
Five past winners of the Nobel Economics Prize generally favour an increase in regulation of financial markets, the German news magazine Der Spiegel reported Saturday. The magazine said it asked them for comment before key world leaders hold a G20 meeting on the crisis in Washington.
Those asked for a recipe were four US academics, Joseph E Stiglitz, Paul A Samuelson, Edmund S Phelps and Robert E Lucas and one German, Reinhard Selten. Lucas was quoted saying the best solution would be a competitive banking system where deposits were guaranteed by the state.
Selten called for investment products to be classified like food so that the risks were known to investors and said new rules for financial markets must extend to hedge funds "Banks must under no circumstances be allowed to shift highly speculative contracts off their books into special entities created for the purpose," he said. Those entities were not subject to the strict rules prevailing over banks.
Stiglitz called for a global solution to a global problem, saying the existing financial structures were not only faulty but also unjust, especially to developing nations. He also said the global foreign-exchange reserves system based on the dollar was getting threadbare.
Samuelson, 93, was fiercest in his criticism, saying those who relied purely on market forces were "emotional cripples." He said rules set by the state should regulate enterprise and aim at stabilising the economy as a whole." Phelps said, "New rules are needed here and there." But he predicted that strictly regulated banks would not be ideal suppliers of capital for innovative ideas, and society should not regulate hedge funds or providers of risk capital.
HIT THE GROUND RUNNING: US Treasury Secretary Henry Paulson, like many European finance ministers, did not attend the meetings in Sao Paulo. Obama, speaking in a US radio address, said it was vital that Americans put aside the divisions of the recent election campaign "and that is particularly important at a moment when we face the most serious challenges of our lifetime."
He said in a radio address that he would waste no time in moving ahead to fight the crisis. "While we must recognise that we only have one president at a time and that President Bush is the leader of our government, I want to ensure that we hit the ground running on January 20th because we don't have a moment to lose," Obama said.
It was not clear whether Obama would attend next weekend's summit of G20 leaders in Washington. Some European leaders have said the meeting offers a chance to lay the groundwork for big changes in the way the global financial system is run at further meetings early next year.
French President Nicolas Sarkozy said on Friday that Europe backed a French-inspired agenda that included a stronger role for the IMF, surveillance of credit ratings agencies and caps on excessive risk-taking. The White House said on Saturday it saw common ground with European leaders on how to address the financial crisis and agreed on the need to move quickly with some reforms but was quiet on specifics.
The head of the IMF said that leaders coming to Washington should bring with them new ideas for boosting their economies through monetary and fiscal moves, and to ensure the Fund had enough funding to do its job of helping countries survive the financial turmoil.
"There is scope for fiscal expansion in many advanced and some emerging market economies; and with inflation declining, some central banks have scope for further monetary easing," IMF Managing Director Dominique Strauss-Kahn said in a letter to the G20 heads of government.
Canadian Finance Minister Jim Flaherty said he expected central bankers in Sao Paulo, including Ben Bernanke of the US Federal Reserve and Jean-Claude Trichet of the European Central Bank, to continue discussions about joint action to lower interest rates further and counter the blow to growth from the credit crisis.