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Stephen Long with the week in finance. -

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For our regular Friday night chat on economic issues of the week, Lateline is joined by economics
correspondent Stephen Long.

Transcript

LEIGH SALES, PRESENTER: Economics correspondent Stephen Long is with me on to analyse the events of
the G20 meeting. Stephen, what do you make of the issues facing the G20.

STEPHEN LONG, ECONOMICS CORRESPONDENT: Well, what interests me about the agenda Leight, is that
they seem to be trying to put in place rules and procedures to prevent the next crisis, or at least
try to, and it's almost as if the assumption is that the current crisis has been done and dusted
and dealt with. I think that is a heroic assumption, challenges clearly remain.

LEIGH SALES: So what's not on the agenda?

STEPHEN LONG: What's not on the agenda is the issue that was first and foremost if you go back six
months or so, which was removing the toxic assets from the global banking system. What's shifted is
that, rather than finding a way to force the banks to write down the value of the assets or get
them outside of the banking system through some means, they have just relaxed the accounting rules,
so that banks no longer have to declare losses on those assets. They have not dealt with that other
than through the accounting change.

If you look at the underlying loans, statistics out yesterday from the Reserve Bank highlighted a
figure that, amongst the world's major banks, there has been a 70 per cent increase in provisioning
for loan losses over the past six months. Clearly there is still a lot of problem debt in the
system and a lot of leverage to be wound off.

LEIGH SALES: So can you run us through what the G20 is looking at doing regarding banking
regulation?

STEPHEN LONG: The key change on banking regulation is that they are putting in place rules that
will mean banks have to hold higher quality capital. If you look at the regulatory capital, this
crisis proved that a lot of it was actually a chimera, it was dodgy, it was really there if push
came to shove, so they want them to hold better quality capital, shares and the like. And also,
what's known in economics is pro-cyclical capital, which is that in good times they have to run up
more money, more capital against their assets, so that what the bad times hit then they are
actually in a position to deal with it. When the value of their assets starts to go down, they have
enough capital to cover it.

LEIGH SALES: Do you think the G20 is going to succeed in avoiding another global financial crisis
of the magnitude we have seen?

STEPHEN LONG: No, I don't. I think it is in the nature of the beast. There is an inherent tendency,
if you look over the history of crises, towards speculative euphoria in good times and then crashes
and Ponzi finance. This has been a big one driven by financial regulation and the complex financial
instruments that gave rise to this crisis, but no, they won't prevent another crisis, although they
can have a good shot at making sure it's not as bad as the one we have just seen.

LEIGH SALES: Stephen Long, thanks for coming in.