The story told in a New York Times article, West Is in Talks on Credit to Aid Poorer Nations, is finally getting to the core of how widespread the damage may be from the current crisis in world financial markets. What was once thought to be an American problem, with Europeans claiming they weren’t vulnerable to the errant decisions of Wall Street, is now revealing itself to be something of a monetary virus.
What Happens in America, Doesn’t Stay in America
The gyrations of global stock markets have provided much fodder for daily headlines, leaving some with the impression that those most affected are largely the investors. But when credit markets freeze up, the developing countries who rely on loans to build and outfit their factories are shut out, and this inability to produce products for export, combined with the United State’s inability to sell capital equipment, results in lower economic activity on both sides of the trade equation.
On the Brink of Recession
As illustrated in the chart above, the nature of this financial virus is similar to that of any virus – it’s spreading far and wide at a rapid pace, taking down the innocent along with the guilty. Admitting as much in a related article, Alan Greenspan spoke of his Error on Regulation that has left him “in a state of shocked disbelief” upon witnessing the effects of the crisis. The destructive duality of greed, in which Wall Street financial firms pushed lenders to lower their home loan standards in order to satisfy the rising demand for mortgage-backed securities, was greeted with smiles from the lenders who would benefit from ever more lucrative loan fees.
As with most ebullient frenzies, the excitement of the ride while on the way up ultimately transforms into fear and panic on the way down, and many countries that just a few months ago seemed to be sitting on the sidelines observing the world’s major financial powers writhe in pain are themselves now teetering on the brink of insolvency.
Globalization & Global Regulation
From the perspective of the struggling farmer, toiling to achieve a successful rice harvest, globalization has provided new opportunities for financial gain. But that same farmer, who has no way to influence the workings of powerful and entrenched political or financial entities, suffers most when the economic train derails. If you ask the question, “Do our thoughts, words and deeds benefit the entire planet?”, the answer with regards to managing global financial markets is clearly, no, as we are now experiencing the sour effects of self-centered thoughts, words and deeds.
There’s an interesting article by Jayati Ghosh in the Guardian newspaper, Global Inequity Must End, in which she talks about recognizing “the need to reform the international economic regime.” To be sure the article expresses one person’s view, but it highlights the fact that there are some tough questions that need to be asked when looking back at the most recent period of global growth.
At what point does economic expansion benefit the world’s poor, as opposed to the world’s poor being used to subsidise the world’s richest?
How do we balance the good which results from free-market forces with the dangers inherent in any system that lacks fundamental controls?
In the coming months and years there will be much debate on such questions, and the answers will not be clearly contrived. Rather, I believe we are in for a period of convoluted hybrid solutions and compromised values that seek to protect those most vulnerable while in no way threatening those who make the rules. Can such a balance be found?
What are your thoughts with regard to managing global markets?