Comments on: The Global Economic Crisis, Murky Protectionism, and Developing Countries http://www.globaleconomicgovernance.org/blog/2009/03/the-global-economic-crisis-murky-protectionism-and-developing-countries/ from the Global Economic Governance Programme at the University of Oxford Mon, 06 Dec 2010 15:39:53 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Rev. Ojewumi, J.S. http://www.globaleconomicgovernance.org/blog/2009/03/the-global-economic-crisis-murky-protectionism-and-developing-countries/comment-page-1/#comment-9219 Rev. Ojewumi, J.S. Fri, 12 Mar 2010 11:11:37 +0000 http://www.globaleconomicgovernance.org/blog/?p=341#comment-9219 Guided Globalization is what should be promoted in the developed nations so as to assist them to grow. Guided Globalization is what should be promoted in the developed nations so as to assist them to grow.

]]> By: Dr. R. Shashi Kumar http://www.globaleconomicgovernance.org/blog/2009/03/the-global-economic-crisis-murky-protectionism-and-developing-countries/comment-page-1/#comment-6528 Dr. R. Shashi Kumar Wed, 25 Nov 2009 17:31:16 +0000 http://www.globaleconomicgovernance.org/blog/?p=341#comment-6528 The financial problem associated with U.S. subprime loans is becoming a global economic problem. Arguments are increasing from Europe and Japan that this is the beginning of the end of the U.S. globalization system and may become a serious international political problem if it persists over a long period. We may recall that political support of fascism and communism grew in certain parts of the world 80 years ago because the international great depressions in the 1930s invoked serious feelings that global capitalism was collapsing. Therefore, resolving today’s financial crisis quickly may not merely be a problem of U.S. economic policy but should be considered an urgent action point for stability of the international community as a whole. The point is that housing prices could cease to fall soon or they could continue deteriorating for years. Both scenarios could be self-fulfilling and which of them will be materialized depends upon policy actions now. Japan’s experience tells us that policy-makers should prepare for a worst-case scenario in which a vicious circle continues. My concern is that economic policy-makers in the U.S. and other G7 countries seem to have chosen a wait-and-see policy on the U.S. financial system, laden with risky and wishful thinking. Self-help by financial institutions may not be able to stop this vicious circle because losses can swell beyond control as asset prices fall sharply. In this situation, a fear of future insolvencies in financial institutions persists as part of a “self-fulfilling prophesy,’’ in which fear shrinks the economy, which in turn lowers asset prices; and lowered asset prices in turn justify the fear of insolvencies. Banks cannot be released from this vicious circle by reinforcement of their capital unless investors are committed to unlimited capital augmentation. My arguments here may at the moment be politically incorrect, especially among economists. This was the case in Japan 10 years ago. Why should taxpayers bear the costs, if any, of saving inept bankers? Japan found the answer: because otherwise the weakest in society will be forced to pay for the bankers’ mistakes over the long term due to the malfunctioning payment system. Political damage will also be immeasurable if the U.S. economy loses its credibility as the most affluent and well-functioning market economy in the world. A wait-and-see attitude on the financial system based on wishful thinking that housing prices will soon pick up is extremely risky, since inaction feeds fears of future bank insolvencies, which drops housing prices further. Responsible policy-makers should prevent a self-fulfilling insolvency crisis by setting out a clear provision now. References The financial problem associated with U.S. subprime loans is becoming a global economic problem. Arguments are increasing from Europe and Japan that this is the beginning of the end of the U.S. globalization system and may become a serious international political problem if it persists over a long period. We may recall that political support of fascism and communism grew in certain parts of the world 80 years ago because the international great depressions in the 1930s invoked serious feelings that global capitalism was collapsing. Therefore, resolving today’s financial crisis quickly may not merely be a problem of U.S. economic policy but should be considered an urgent action point for stability of the international community as a whole.

The point is that housing prices could cease to fall soon or they could continue deteriorating for years. Both scenarios could be self-fulfilling and which of them will be materialized depends upon policy actions now. Japan’s experience tells us that policy-makers should prepare for a worst-case scenario in which a vicious circle continues. My concern is that economic policy-makers in the U.S. and other G7 countries seem to have chosen a wait-and-see policy on the U.S. financial system, laden with risky and wishful thinking.

Self-help by financial institutions may not be able to stop this vicious circle because losses can swell beyond control as asset prices fall sharply. In this situation, a fear of future insolvencies in financial institutions persists as part of a “self-fulfilling prophesy,’’ in which fear shrinks the economy, which in turn lowers asset prices; and lowered asset prices in turn justify the fear of insolvencies. Banks cannot be released from this vicious circle by reinforcement of their capital unless investors are committed to unlimited capital augmentation.

My arguments here may at the moment be politically incorrect, especially among economists. This was the case in Japan 10 years ago. Why should taxpayers bear the costs, if any, of saving inept bankers? Japan found the answer: because otherwise the weakest in society will be forced to pay for the bankers’ mistakes over the long term due to the malfunctioning payment system. Political damage will also be immeasurable if the U.S. economy loses its credibility as the most affluent and well-functioning market economy in the world. A wait-and-see attitude on the financial system based on wishful thinking that housing prices will soon pick up is extremely risky, since inaction feeds fears of future bank insolvencies, which drops housing prices further. Responsible policy-makers should prevent a self-fulfilling insolvency crisis by setting out a clear provision now.
References

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