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The past week was marked by the beginning of the G-20 summit in London which gathered the leaders of the world’s largest economies. The focus of the agenda was the financial crisis and more specifically the coordination of an international stimulus package as well as the development of new regulations for financial institutions.

We already know that stimulus packages do not work (there have been plenty of those since last year, and still not a hint of recovery), but what about this new set of international regulation?

As TIME magazine states, “The original concern of the leaders who will come to the summit is that a lack of regulation was the root cause of the financial and credit catastrophe that ruined the international banking system.”

World leaders must be very out of touch if that is their main concern. The financial crisis was not caused by a lack of regulation — it was caused by massive government intervention in the housing market via Fannie and Freddie. The housing bubble that caused our current woes propagated through the economy precisely because of the same international regulations G-20’ers intend to increase.

I refer to two of those regulations. The first one is the mark-to-market accounting standard (or fair market value), which states that the only way to value an asset (such as a mortgage) is by eyeballing its price on the stock market. But pricing is a delicate endeavor; practitioners spend years studying valuation precisely because there is no one perfect way to value an asset.

Nevertheless the International Accounting Standard Board (IASB), an international regulatory body, insisted that this was the way companies all around the world should value their assets and convinced FASB (the American Accounting Board) that their method should be imposed on American companies.

It has been proven in numerous academic writings (Adrian & Shin 2008, Allen & Carletti 2006, Plantin, Sapra & Shin 2007), that these rules impose unnecessary costs and uncertainty on the market. These academic theories were confirmed during this crisis and today we know that the mark-to-market rule, as promoted by this International Regulatory Board, contributed very much to the propagation and aggravation of the financial crisis.

This is why FASB has decided to suspend the mark-to-market rule, and this is why the IASB is also backing off. If the institutions that imposed international regulation on accounting have helped create such a mess, the least we can do is be suspicious of further international regulatory action.

The other international regulatory institution that was strongly linked with the current financial crisis is the Basel Committee. This international regulatory body sets standards for banks worldwide. More precisely, it fixes the minimum capital requirement of banks (see Basel II), determining how much they can effectively lend.

When banks saw their asset value decay, their equity became thinner and they risked not being able to meet the Basel II capital requirements. This in turn froze the interbank credit market and banks stopped lending to each other because they wanted to build a cushion that would keep them safely above the minimum capital requirements. Had these rigid capital requirements not existed, banks would not have been forced to stop lending.

As we can see, there was already heavy international regulation and powerful global financial regulatory bodies in place before the G-20 meeting. These international financial regulations not only tell financial institutions how to value their assets, but they also tell them how much they can and cannot lend. Moreover, not only were those heavy international regulations totally ineffective in preventing this crisis, they actually made the problem much worse.

But this is of no concern to G-20 leaders, who have apparently discarded these facts. Instead, they chose to create an even bigger and more powerful international regulatory entity: the Financial Stability Board (FSB). This FSB has been granted huge powers. For example, it can implement principles on pay and compensation and on the social responsibility of all firms. It will extend oversight to “all systemically important financial institutions, instruments and markets.” Please note the scope of the power of the FSB: all firms.

What is of even more concern is that Congress and other democratic institutions had absolutely no say in this new set of regulations that is being imposed on Americans by a non-elected group of people. Dick Morris, former advisor to President Clinton, called this the repeal of the American Declaration of Independence. Hopefully he is wrong, but, if not, we can still enjoy the sensationalism of this G-20 summit.