Those were the days, my friend.
We thought they’d never end.
Alas, the good times ended!
It is hard to believe that just 12 months ago, the world seemed so rosy. We explicitly believed in the optimistic conclusions of Pulitzer-Prize winning author Thomas Friedman. His book “The World is Flat” described the positive economic, political and technological forces that have influenced the globe since the fall of the Berlin Wall. The end of the Soviet Union eliminated many of the constraints that had impeded worldwide cooperation and communication. In its place, democratic and free-market-oriented governance encouraged individuals to partake fully in the dynamics of global advances — the world was their oyster.
Globalization would create a world that was flat with rising per-capita income. Companies would incorporate the best ideas, manufacture at the lowest costs, and distribute products efficiently to meet worldwide demand.
The flip side of globalization is worldwide influenza. Stock markets have declined anywhere from 40 percent to 70 percent. Extrapolating from levels at the end of 2007, the Morgan Stanley Capital Index indicates the value of global markets has declined some $15 trillion from year-end levels of $63 trillion.
The International Monetary Fund defines a global recession for developed countries as a global growth rate below 2.5 percent and emerging countries below 6 percent. China worries about its growth rate slipping below 10 percent. That nation must annually relocate millions of its poor rural farmers into higher paying urban areas. Otherwise, China would lose credibility with its increasingly restless population.
The noted economist Nouriel Roubini recently commented: “There is now an increasing probability that the global economy — not just the United States — will experience a serious and protracted recession. … And once this group of 20-plus economies (The most-developed 20 nations) enters into a recession there will be a sharp growth slowdown in the BRICs (Brazil, Russia, India and China) and other emerging market economies.”
Fortunately, unlike the Great Depression when countries mistakenly tried to stop economic declines at their borders, there has been significant worldwide collective efforts to buttress liquidity and shore up failing institutions. Trillions of dollars have been poured into the world financial system to halt the decline. Central bankers have coordinated reductions in interest rates and poured money directly into their failing domestic financial institutions.
For example, Japanese political leaders encouraged Mitsubishi UFJ Financial Group Inc. with promises of low cost loans of $10 billion to invest $9 billion into beleaguered Morgan Stanley. Both the Japanese government and Mitsubishi UFJ understood the benefits of participating meaningfully in a world-class financial power.
China’s $2 trillion war chest could boost its domestic spending, maintain healthy infrastructure expansion and provide liquidity to beleaguered nations.
Mexico plans to take remedial steps to fund its cash-strapped businesses.
Hopefully, all of these multi-faceted efforts will succeed because economic failure will lead to political turbulence. The regimes of countries in Eastern Europe, Africa and South America might not be able to withstand significant economic dislocations.
Federal Reserve Chairman Ben Bernanke, a scholar on the Great Depression, understands well the economic and political stakes. Specifically, the Depression led to Hitler’s accession in Germany.
New York Times columnist Tom Friedman wrote a piece on Oct. 26 headlined “If Larry and Sergey asked for a Loan.” He provided useful insights.
“We must not overshoot in regulating the markets just because they overshot in their risk-taking. That’s what markets do. We need to fix capitalism, not install socialism. Because, ultimately, we can’t bail our way out of this crisis. We can only grow our way out — with more innovation and entrepreneurship, which create new businesses and better jobs.”
In conclusion, our politicians and financiers are working around the clock to come up with innovative solutions. We can expect further fiscal stimulus efforts and programs directed toward arresting the decline in housing prices. It is true, my friends, that these unhappy days will also end. We are older and wiser. We still dance but to a slower beat.
Originally published in the Sarasota Herald-Tribune
