"Fixing the Financial Crisis"-Global Solutions
Thursday, November 13, 2008SUSIE GHARIB: World leaders gather in Washington tomorrow for a summit on the global economy. President Bush says that aim of the meeting should be smarter government, not more government. In a speech on Wall Street today, the president said the crisis didn't happen overnight and will take time to fix. He says a key part of that fix will be increasing transparency.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: One vital principle of reform is that our nations must make our financial markets more transparent. For example, we should consider improving accounting rules for securities so that investors around the world can understand the true value of the assets they purchase.
GHARIB: The president also said the world economy is more interconnected than ever before. That's one reason why the financial crisis has affected nearly every economy in the world and it will take global coordination to repair the damage. As we wrap up our series, "Fixing the Financial Crisis," Suzanne Pratt looks at global solutions.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It didn't take long for Wall Street's nightmare to become the world's mess. The U.S. was the first domino to fall, when financial institutions were forced to rid their balance sheets of sub-prime mortgage debt. The stresses coming from that de-leveraging quickly spilled overseas to engulf much of the world, even those nations with little or no direct exposure to the toxic debt. Iceland is perhaps the most notorious example, with its banking system and currency almost collapsing. As the contagion spread this fall, international stocks got pummeled. Stock exchanges in emerging markets like Brazil, China and Russia experienced steep losses. Economist David Hale points out that concerns about billions of dollars in U.S. sub-prime mortgages wiped out trillions of dollars in global stock market capitalization.
DAVID HALE, CHAIRMAN, DAVID HALE GLOBAL ECONOMICS: It's truly extraordinary how a uniquely American problem centering on irresponsible reckless mortgage lending has turned into a global crisis.
PRATT: Economist Bruce Kasman says we're just starting to see the global fallout from the financial crisis.
BRUCE KASMAN, CHIEF ECONOMIST, JP MORGAN CHASE: This is going to be very painful. Our estimates right now have a global economic downturn at least as deep as the early 1980s and that was a very deep one on a global basis. And for the developed world for the U.S., western Europe and Japan, it looks like it's going to rival the mid-'70s, which has been the deepest downturn we've had in the post-World War II era.
PRATT: The International Monetary Fund predicts output in many advanced economies will contract next year, with the U.S., Euro zone, Japan and the UK doing so simultaneously. The IMF also forecasts that many emerging and developing economies will escape the global recession. In particular, China is expected to generate a more than 8 percent increase in output.
HALE: But China's GDP is only about $3 trillion compared to $14 trillion in the U.S., $15 trillion in Europe, $4.5 trillion in Japan. So China by itself is not yet largest enough to compensate for the weakness in the old industrial countries.
PRATT: Several nations have taken decisive policy action, including huge stimulus plans and sharp interest rate cuts. Even without knowing the full effects of the crisis, world leaders are already considering changes to the global financial architecture, so that something of this magnitude never happens again. This weekend, the leaders of the group of 20 industrial and emerging countries gather in Washington to review progress made on the crisis and to try to agree on principles of reform for the world's financial sectors. Observers say the likely topics of discussion include everything from raising bank capital standards, to the adoption of universal accounting rules, to international oversight of credit default swaps. Economist Roger Kubarych says also likely to be scrutinized is how nations could work together to supervise financial companies, including the need for a global lender of last resort.
ROGER KUBARYCH, SR. FELLOW, COUNCIL ON FOREIGN RELATIONS: That may go beyond current institutions like the IMF. The bank for international settlements in Basel, Switzerland, is an expert group that has tremendous promise, isn't being used enough. And our own litany of many regulatory agencies has to be simplified and made more functional.
PRATT: Observers say the summit will pit U.S. support for free markets against European calls for tighter government control, lead by French President Nicolas Sarkozy. But experts say no nation currently has a financial regulatory system that really works, one that could be a model for other countries to adopt. And for those who worry that too many regulations will mean the death of capitalism, economists say that's unlikely, mostly because the world is dependent on America's entrepreneurial spirit.
KUBARYCH: We encourage small business development. We encourage the - shall we say the creative destruction process of upstart companies challenging old, established businesses. Many other countries put lots of roadblocks in that and basically look to the big companies to self- engineer, self-innovate and it doesn't work that well.
PRATT: Anyone hoping for a quick fix to the financial crisis may be disappointed. Given the varied goals and many participants, this weekend's summit is likely to be the start of a long debate on global reform. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
