As you are reading this, the G-20 summit is underway in London. This is a summit that Anne Applebaum, (a columnist for Slate Magazine, a Pulitzer Prize winner and also the wife of Poland’s foreign minister) has dubbed “something that is loud, unnecessary and costs $75 million.”

It is difficult not to agree with her when you consider that these leaders come to London to tackle difficult global issues during a meeting that lasts just one day. Indeed, to make it easier for the leaders, the host – the UK – has prepared a draft communiqué that the leaders will sign on Thursday at the close of the meeting. That is, of course, if they agree.

But when you look at the draft communiqué, a number of issues come to mind:

The leaders will have to tackle the issue of stimulating the economy so as to create new jobs. In the communiqué, it is written that the efforts so far have created 20 million jobs. But then, the stimulus packages have been undertaken by the US and UK. Other major countries like France and Germany are weary of implementing such stimulus packages.

There are two major reasons for this: First, these countries think that such a package will not stimulate the economy and, more importantly, these countries - euro zone members - have to adhere to strict fiscal spending limitations, generally known as the Maastricht Criteria. Therefore, euro zone countries cannot borrow as much as they wish, unlike the US or UK.

Return to government intervention

The leaders are optimistic and expect global economic growth to start by next year. They expect this growth to be fueled by fiscal stimulus. This is a return to fiscalism and government intervention – something that the world has turned away from over the last 20 years or so. This fiscalism will be limited in the EU, as countries will have to adhere to the Maastricht Criteria.

What about countries like the BRICs (Brazil, Russia, India and China)? These countries will come to London with the intention of changing the distribution of global economic power, especially since they wish to have greater influence on global economic affairs. To show how determined these countries are, one has to remember last week’s words from the Brazilian president Lula da Silva, who said that “the current crisis was caused by blue-eyed people who thought that they were intelligent. Now they are asking us to bail them out!”

On the other hand, China is looking for a replacement of the US dollar as a global currency. The question is: Which currency will it be? The Chinese are suggesting the SDR – the IMF virtual currency whose value is expressed as a composition of the dollar, pound, euro and yen.

These, and the many other differences between the countries, suggests that at the end of the day, fiscal stimulation of the economy will fall on deaf ears!

More money for the IMF

The leaders propose giving the IMF more money, to be lent to countries facing hardships such as Iceland, the Baltic States, Hungary and various developing countries.

The idea is to fund the IMF to the tune of $500 billion. The question is: Who will put up these funds? Considering that the US, UK and EU are in recession and need funding, the only option is to ask those countries with excess cash. These are oil-exporting Gulf States and Norway. But what do you give these countries in return? A permanent seat on the UN Security Council or membership of the G-8 so that it becomes the G-10?

Developing countries

The communiqué goes on to state that helping developing countries is critical to further global development. The mistake here is that this help will be in line with the so-called Millennium Development Goals – a set of mysterious and opaque goals to be attained by 2030 or 2050! The problem is that those financing the MDGs will dictate how this money is used. Basically, this means developed countries exporting their unemployed to developing countries.

Therefore, expect developing countries to come back from this summit empty-handed.

Improving the financial market

Finally, the communiqué contains a number of measures aimed and correcting and improving the global financial market. Basically, the proposal involves the introduction of more stringent regulatory activities and pumping taxpayers' money into the system.

But so far what the banks have done is to “sit on the money” and/or pay it to their bosses as bonuses and perks. Banks cite a lack of trust in the system as preventing them from lending out this money. Thus, further cash infusions will not improve the situation in the banking system and therefore will not solve the problem.

Begin at the beginning

I am of the opinion that the current global crisis originated from the US and therefore solving these problems must start from the US as well. But this does not mean infusing trillions into the banking system. Rather, it means removing the defaulted debt – the very first reason why we got into this crisis.

This can only be achieved by forgiving the debt of those who borrowed the money – the folks on Main Street. In this way, the toxic instrument that created the poison that was later on transmitted throughout the global financial system will be neutralized. The cost is not as huge as what has already been pumped in the system: assuming that the average mortgage size in the US is $300,000, and that CNN Money is correct when it says that “a total of 1,081,395 homes have been lost to foreclosure since the housing crisis hit back in August 2007,” the money needed to clean out the system must reach at least $324.4 billion.

This is roughly half of what former Treasury Secretary Henry Paulson had pumped into the banking system at the end of the Bush Administration – without any result.

Furthermore, data from the Mortgage Bankers Association of America shows that outstanding multi-family debt stood at $890 billion in the second quarter of 2008. This is much lower than what has so far been pumped into the system.

Cleaning the system

As we can see, the US has the appropriate money to wipe out the debt and thus, the toxic instruments in the financial system. This would be the starting point for cleaning out the financial system because borrowers would be cleared of any debt and their credibility dramatically improves to further stimulate the economy.

Secondly, the banks receive money to clear their outstanding debts and this improves the banks' positions on the interbank market.

Thirdly, with the guy on Main Street unburdened, he can start new activities and purchase new products, in this way halting the further spread of the crisis.

The final stage of “cleaning” the system would involve removing the liabilities created by virtual financial instruments created at the height of the boom in 2006-2008. However, only tangible instruments like bonds or CDs can also be cleared in a similar way.

Without such a grass-roots solution that solves the problem at its root cause, do not expect much from the London G-20 summit, especially since each and every leader will take this opportunity to show his home audience that he has fought very hard to achieve the best for his country – especially the French and the Germans.

Dr Richard Mbewe

Dr Mbewe is an expert on macroeconomics and a managing partner & CEO of Atria Real Estate Partners