Going Global On The Great Recession
I covered a bit of this in last night's week in review, but the World Bank's report that the world will experience negative economic growth in 2009 for the first time since WWII is very discouraging news. I don't know if I agree with the framing of this Washington Post story - this was as much a problem of sovereign wealth funds and international banks BUYING junk mortgage-backed securities as it was the lending frenzy in the US and the distribution of the mortgage-backed securities themselves - but the implications of this negative growth are severe.
The World Bank also cautioned that the cost of helping poorer nations in crisis would exceed the current financial resources of multilateral lenders. Such aid could prove critical to political stability as concerns mount over unrest in poorer nations, particularly in Eastern Europe, generated by their sharp reversal of fortunes as private investment evaporates and global trade collapses.
In its report, released ahead of a major summit of finance ministers in London this week, the World Bank called on developed nations struggling with their own economic routs to dedicate 0.7 percent of the money they spend on stimulus programs toward a new Vulnerability Fund to help developing countries.
The report predicted that the global economy will shrink this year for the first time since the 1940s, reducing earlier estimates that emerging markets would propel the world to positive growth even as the United States, Europe and Japan tanked. The dire prediction underscored what many are calling a mounting crisis within a crisis, as the downturn that started in the wealthy nations of the West washes over developing countries through a pullback in investment, trade and credit. Despite the United States' position as the epicenter of the crisis, investors are flocking to U.S. Treasury bills and the dollar, squeezing developing nations out of global credit markets.
Certainly the idea of a global stimulus is one that the US is pushing. There are very real, frightening national security implications to developing nations collapsing, and it's important to deal with that shortfall in demand instead of isolating regulatory reform (which is also needed) at the G20. Even while the US stimulus looks to be coming in low, it's relatively high compared to most other developing nations. The more that there is a unified global stimulus, the less leakage from one country to the next (which is the concern with the US, say, stimulating the Chinese economy through the consumer purchase of a lot of their goods) and the better for global trade, which has absolutely cratered. Larry Summers actually talked about this today in the Financial Times.
Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a co-ordinated effort to boost demand and lift the world out of recession.
In an interview with the Financial Times, Lawrence Summers said the urgent need for a short-term increase in spending by governments temporarily overrode the longer-term goal of tackling the global imbalances many economists believe caused the financial crisis.
The US administration had no choice but to take strong public action to “save the market system from its own excesses”, he said.
His comments, ahead of next month’s crunch G20 summit in London, make it clear that the US administration wants industrialised nations to share responsibility for engineering a global demand-led recovery and does not believe this burden should fall on China alone.
“The old global imbalances agenda was more demand in China, less demand in America. Nobody thinks that is the right agenda now,” said Mr Summers.
“There’s no place that should be reducing its contribution to global demand right now. It is really the universal demand agenda.”
That's the only way out of this crisis, which is why Republican calls for a spending freeze are so absurd. Still, it's important to recognize that even a global demand surge up to the levels of the United States would probably not be sufficient to stem the tide of downturn. Paul Krugman notes today that policymakers are behind the curve:
To see how bad the numbers are, consider this: The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February — and it’s rising fast [...]
So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.
But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.
O.K., that’s a warning, not a prediction. But economic policy is falling behind the curve, and there’s a real, growing danger that it will never catch up.
Cheery Monday news!