World stock markets have dropped 5 percent to 10 percent following the G-20 meeting that ended Nov. 16. Investors lack confidence that governments can halt the slumping world economy or unfreeze credit markets. For the first time, Japan, Europe and the United States experienced simultaneous recessions in the post-World War II era.
At the other end of the spectrum, emerging economies suffer from weakening exports, a collapse of private capital flows and declining commodity prices. Economists worry about the prospect of deflation in the wake of global demand slackening. The real economic decline in the United States in the fourth quarter could be a negative 5 percent.
President-elect Barack Obama has a daunting challenge because the United States has squandered its financial power by its twin fiscal and current account deficits.
Our foreign liabilities of $2.5 trillion reflect wanton spending, not capital investments. In 2009, foreign borrowing will approach an additional $2 trillion. Raising this colossal sum remains problematic given the shrunken surpluses of OPEC nations and major exporters. Our debtor status starkly contrasts with our enviable creditor position during the Great Depression.
Obama, sensing our precarious financial conditions, has prioritized the selection of members of his economic team and proposed a fiscal stimulus program approaching $500 billion to create 2.5 million jobs. Nevertheless, weak consumer demand might negate these immense public sector initiatives.
The current financial crisis highlights the weaknesses of the institutions established in the 1940s. Specifically, the financial resources of the International Monetary Fund and the World Bank pale in comparison to our current global challenges. Establishing trillion-dollar central bank swap lines could be an important step in overcoming mounting concerns over global liquidity squeezes that threaten countries such as Iceland, Argentina, Indonesia and those of the Baltic States
Never again! Financial institutions can no longer operate in the opaque twilight zone. Shadow banking practices such as off-balance-sheet financing, hedge funds and private equity firms must operate within a regulatory framework. The systemic risk generated from highly leveraged investing on misunderstood securities is intolerable given the incestuous nexus of the financial system.
To date, most of the rescue efforts have focused on banks because they are the pivotal wheel-greasers whose loans fund the other economic sectors.
When Nicolas Sarkozy, the French president, first proposed a G-20 meeting, some predicted it would be dominated by finger-pointing. Now, critics bemoan the communique did not go far enough in assigning blame for the crisis to the irresponsible credit policies throughout the globe.
British Prime Minister Gordon Brown’s idea of a “college of supervisors” to oversee the biggest financial firms deserves vetting. Brown recognized that globalization has enabled multinational banks and corporations to leapfrog across national borders to find the most hospitable “benign neglect” climates that offer the most lenient tax policies, lowest labor costs and laissez-faire regulatory climate.
Asian economies are vulnerable because exports accounted for 46.7 percent of the region’s domestic product in 2007, according to Stephen Roach, Morgan Stanley’s Asia chairman.
China has taken steps to make up for shrinking exports. It announced a $586 billion economic package financed entirely from internal savings to offset slumping foreign demand.
Over the next two years, China will increase expenditures on low-income housing, rural infrastructure, water and electricity supplies.
China needs to grow at very high rates, some 8 percent, to meet its domestic needs.
China’s ability to fund its fiscal stimulus internally contrasts starkly with America who must borrow the necessary funds from abroad.
In a Nov. 16 column in the New York Times, “Gonna Need a Bigger Boat” Tom Friedman pleaded, “Right now we need to throw everything we can at this problem to make sure this recession doesn’t spiral down into a depression. This is no time for half-measures.
Friedman concluded with these comments: “If you want to know where we are right now, rent the movie ‘Jaws.’ We’re at that moment when Roy Scheider first sets eyes on the Great White Shark and comes back and says to the skipper, with eyes wide with fear: ‘You’re gonna need a bigger boat.'”
Originally published in the Sarasota Herald-Tribune
