We are feeling the pain acutely at home, but one thing is clear: this is a worldwide pheonomenon. And although world bankers see a gradual bounce later in the year, others including the World Bank are not so confident.
The World Bank last week stated that the entire planet is going through its biggest negative economic cycle since the Great Depression. The U.S., Europe, South American, Asia, Australia, and even Africa are feeling the after effects. Developing countries, who sell much of their goods to developed nations, are feeling the pinch the most.
Here is the simple question: Is this all America’s fault?
Here is the irony: Americans are the first to believe this is our fault. Look at polling. Half of people blame this recession solely on the shoulders of Former President George W. Bush. That would imply that Bush, and the U.S.A., are at fault for this economic mess.
As usual, that is a very narrow and limited view of the world.
The leveraging of mortgages was a worldwide pheonomon. To be sure, it originated in America, as most great financial instruments have over the past century. But Europe (especially Spain, England, and Ireland), much of Asia and South America all used similar financing methods…which of course had terrible consequences.
Additionally, some of the Europeans rules hastened the crash. For example, the infamous ‘mark-to-market’ rule was pushed by EU financial ministers for years, and led to many problems.
The G20 meets this week, and it appears that they are largely going to ignore President Obama, Treasury Secretary Timothy Geithner, and Federal Reserve Chairman Ben Bernanke’s recommendations of a large worldwide stimulus plan. They will lay out a set of principles on how to address the toxic assets weighing on banks’ balance sheets, a person familiar with the matter said. They also plan to reach an agreement to increase the funds available to the International Monetary Fund, although the final amount will be decided later. The official said the G-20 will agree to require the registration of credit rating agencies, a move towards regulation of those companies that many developing country governments will welcome.
Ironcially, the roles have reversed somewhat. The U.S., which traditionally has pushed for lower tax rates, is actually increasing taxes. On the other hand, several European and Asian countries are pushing for tax cuts instead of big government stimulus expenditures. The International Monetary Fund estimates that only Saudi Arabia, Australia, China, Spain and the United States will introduce budget boosts worth 2 percent of gross domestic product this year (with the possibility of Japan joining them soon), the level that U.S. Treasury Secretary Timothy Geithner considers ”reasonable.”
There is also much diversity on whether Hedge funds should be regulated by international bodies. India, China, Russia and Brazil have called for greater oversight, while the west is more resistant. For example, they would like to have more voice in the International Monetary Fund. The EU, led by France, would rather focus on confronting the ‘toxic’ assets held by banks. They feel, as I do, that until this is confronted the credit crisis will not resolve. China, who is the largest foreign creditor to the U.S., this week raised concerns about the U.S. ability to pay those loans, which further increases the risk involved with Mr. Obama’s ever growing budget deficit. It was enough of a concern that the White House put out a statement, declaring the U.S. debt to be the ‘safest in the world’. China is worried that inflationary pressures with increasing U.S. debt would devalue their current holdings.
The one success out of the G20 is progress on tax havens. Under mounting international pressure, Switzerland, Austria and Luxembourg offered on Friday to partly relax strict bank secrecy in some tax evasion cases. Welcome as the moves are to many other countries which fear tax evasion, German Finance Minister Peer Steinbrueck said that Swiss promises to relax secrecy in some cases was no substitute for more ambitious goals formulated by the OECD. Additionally, China has been resistant to these rules, with obviously would hamper finanical industries in Hong Kong and Macau. So a partial victory at best.
The reality is that Mr. Obama and EU ministers have reached no consensus on how to move forward. Everyone agrees something must be done, but foreign financial ministers have lost faith that the U.S. has the knowledge or ability to satisfactorily respond to the crisis, and they seem to be unwilling to follow President Obama until he builds confidence in his financial abilites. The President’s ability to corral these varying viewpoints into a singular financial solution for the world’s economic crisis could be the focal point of Mr. Obama’s first term in office.
UPDATE: Timothy Geithner stated that he is very pleased with the G20 conference, and feels the coordinated financial response of these nations will be adequate for the crisis at hand.