The following is an excerpt from Martin Wolf’s column in the Feb 24 Financial Times:
“My fellow leaders, Franklin Delano Roosevelt abandoned his London summit. I wish to make ours the moment at which we save ourselves. Let us resolve to bequeath renewed prosperity to posterity, not a collapse of the global economy we inherited.
“Let me get a big point out of the way: yes, the US messed up. We thought we knew about sophisticated modern finance. We were wrong. On behalf of my country, I apologise. But this disaster did not happen on my watch. So let us move past the “blame game”. We must learn the lessons and look ahead, not backwards.
“We are in a dire state. In the fourth quarter of last year, gross domestic product shrank at an annualised rate of 20.8 per cent in South Korea, 12.7 per cent in Japan, 8.2 per cent in Germany, 5.9 per cent in the UK and 3.8 per cent in the US. Even China’s economy stagnated. Industry has been particularly hard hit: the latest year-on-year declines in industrial output were 21 per cent in Japan, 19 per cent in South Korea, 12 per cent in Germany, 10 per cent in the US and 9 per cent in the UK. In brief, the world is in deep recession.
“The Washington-based Institute for International Finance also forecasts a collapse in net private capital flows to emerging countries, from $929bn in 2007 to a mere $165bn this year. Credit flows are forecast to shrink by $30bn. The International Monetary Fund also forecasts a decline in the volume of world trade this year.
“Behind all this is a collapse in paper wealth and breakdown in credit (see chart). Profligate deficit countries may have created these viruses. They are not the most vulnerable to it.
“So what must we now do?
“First, we must set priorities. I note with consternation Europeans’ obsession with regulating hedge funds and tax havens. Did they cause this crisis? No. Europeans also call for regulation of all markets, products and participants, without exception. This is like calling for research into radar while the Titanic sinks. Do they realise that the systemically significant banks at the heart of this crisis are the most regulated institutions we possess? Let us not be diverted from today’s priorities.
“Second, the highest priority is to halt the free-fall in demand. Nobody can now still imagine this is somebody else’s problem. I have acted and, if necessary, will do so again. You must also do so, within your own constraints. The surplus countries have the biggest room for manoeuvre. China is showing the way. Let Germany and Japan follow. We all need temporary targets for demand growth, to be monitored by the International Monetary Fund.
“Third, we must fix our financial systems. I am far from content with what my administration has achieved. But we will learn. So must you. Toxic assets are no longer just a pile of securitised subprime US mortgages. If we do not act, we are going to find bad debt everywhere. We have to agree on common approaches to recapitalising financial systems and restoring credit, in order to prevent costly spillovers on to one another.
“Fourth, we must avoid both protectionism and false pieties. We must recognise two harsh realities.
“One is that, with taxpayers called upon to rescue financial institutions, finance will be more domestically directed. We also now know that only big countries can afford to insure global institutions. We must minimise the damage done by this upheaval.
“Another reality is that if the US is unable to expand its exports, pressure will grow to restrict its imports, instead. For deficit countries that are trying to save more than before, as critics rightly insist they should, an improvement in net exports is now essential. We cannot employ exceptional fiscal and monetary measures forever, thereby risking destruction of our government’s creditworthiness and our currency’s value. Surplus countries will need to accommodate these essential adjustments through expansions in demand, relative to potential supply. In a trade war, surplus countries have most to lose. This should not be viewed as a threat, but as a warning.
“Fifth, to get through this crisis and improve the functioning of the entire global system we need much larger, more effective and more legitimate international insurance and monitoring systems. The starting point has to be with a big increase in the resources of the International Monetary Fund and restructuring of voting rights in the institution. It is ridiculous that European countries possess about a third of the votes.
“European leaders have called for a doubling of IMF resources to about $500bn. But, in a world with $7,000bn of foreign exchange reserves, the IMF’s resources need to be an order of magnitude bigger than today. I would support a large-scale issuance of special drawing rights – the IMF’s own reserve asset – and a big shift in voting rights, too. The emerging countries that rely on its insurance need a bigger say in how the IMF and other global institutions function. With such an improved system of insurance, not only will it be possible for emerging countries to run current account deficits more safely in future, but they will not be forced to cut back savagely on spending now.
“As Morris Goldstein of the Washington-based Peterson Insititute for International Economics argues, we need a “grand bargain” – a phrase picked up by Gordon Brown, the UK’s prime minister. The core of that bargain is surely clear to us all.
“Finally, we must put in train comprehensive reform of the structure not just of regulation, but of global finance itself. We need to push this process forward in London. But the challenges are too complex and the danger of unintended consequences too great to fix all this right now.
“So let us focus our efforts on the crisis before us. In the words of Abraham Lincoln, let us be touched by “the better angels of our nature”. Yet we need fight no war. On the contrary, the aim is to strengthen a peaceful and co-operative economic order. We must merely rise above petty concerns. The challenge is now; we must resolve to meet it together.”