We are at a moment when the range of uncertainties facing the global economy is unusually wide. We have just passed through the worst financial crisis since World War II. The only relevant comparisons are with the Japanese real-estate bubble, which burst in 1991 (and from which Japan has not recovered), and the Great Depression of the 1930s — except that this crisis has been quantitatively much larger and qualitatively different.
Unlike the Japanese experience, this crisis involved the entire world, rather than being confined to a single country. And, unlike the Great Depression, this time the financial system was put on artificial life-support, rather than being allowed to collapse.
In fact, the magnitude of the problem today is even greater than during the Great Depression. In 1929, total credit outstanding in the US was 160 percent of GDP, and it rose to 250 percent by 1932. In 2008, we started at 365 percent — and this calculation leaves out the pervasive use of derivatives, which was absent in the 1930s.
In spite of this, artificial life-support has worked. Barely a year after the bankruptcy of Lehman Brothers, financial markets have stabilized, stock markets have rebounded, and the economy is showing signs of recovery. People want to return to business as usual — and to think of the Crash of 2008 as a bad dream.
Unfortunately, the recovery is liable to run out of steam, and may even be followed by a second economic downturn, though I am not sure whether it will occur this year or next.
My views are far from unique, but they are at variance with the prevailing mood. The longer the turnaround lasts, the more people will believe that it will continue. But in my judgment, this is characteristic of far-from-equilibrium situations when perceptions tend to lag behind reality.
To complicate matters, the lag works in both directions. Most people have not yet realized that this crisis is different from previous ones — that we are at the end of an era. Others — including me — failed to anticipate the extent of the rebound.
Overall, the international financial authorities have handled this crisis the same way as they handled previous ones: they bailed out failing institutions and applied monetary and fiscal stimulus. But this crisis was much bigger, and the same techniques did not work. The failed rescue of Lehman Brothers was a game-changing event: financial markets actually ceased to function.
This meant that governments had to effectively guarantee that no other institution whose collapse could endanger the system would be allowed to fail. That is when the crisis spread to the periphery of the world economy, because countries on the periphery could not provide equally credible guarantees.
Eastern Europe was the worst hit. Countries at the center used their central banks’ strong balance sheets to pump money into the system and to guarantee the liabilities of commercial banks, while governments engaged in deficit financing to stimulate the economy on an unprecedented scale.
But the growing belief that the global financial system has escaped collapse, and that we are slowly returning to business as usual, is a grave misinterpretation of the current situation. Humpty Dumpty cannot be put together again.
The globalization of financial markets that took place since the 1980s allowed financial capital to move freely around the world, making it difficult to tax or regulate. This put financial capital in a privileged position: governments had to pay more attention to the requirements of international capital than to the aspirations of their own people. Individual countries found it difficult to offer resistance.
But the global financial system that emerged was fundamentally unstable, because it was built on the false premise that financial markets can be safely left to their own devices. That is why it broke down, and that is why it cannot be put together again.
Global markets need global regulations, but the regulations that are in force are rooted in the principle of national sovereignty. There are some international agreements, notably the Basel Accords on minimum capital requirements; and there is also good cooperation among market regulators. But the source of the authority is always the sovereign state.
This means that it is not enough to restart a mechanism that has stalled; we need to create a regulatory mechanism that has never existed. As things stand now, each country’s financial system is being sustained and supported by its own government. But governments are primarily concerned with their own economies. This gives rise to what may be called financial protectionism, which threatens to disrupt and perhaps destroy global financial markets. British regulators will never again rely on the Icelandic authorities, and Eastern European countries will be reluctant to remain dependent on foreign-owned banks.
So regulations must become international in scope. Otherwise, global financial markets will be destroyed by regulatory arbitrage. Businesses would move to countries where the regulatory climate is the most benign, exposing other countries to risks that they cannot afford to run.
Globalization was successful because it forced countries to remove regulations; but the process does not work in reverse. It will be difficult to get countries to agree on uniform regulations. Different countries have different interests, which drive them towards different solutions.
This can be seen in Europe, where EU nations cannot agree among themselves on a uniform set of financial rules. How, then, can the rest of the world?
In the 1930s, trade protectionism made a bad situation worse. In today’s global economy, the rise of financial protectionism constitutes a greater danger.
George Soros is chairman of Soros Fund Management and the Open Society Institute.
COPYRIGHT: PROJECT SYNDICATE
The image was oddly quiet. No speeches, no flags, no dramatic announcements — just a Chinese cargo ship cutting through arctic ice and arriving in Britain in October. The Istanbul Bridge completed a journey that once existed only in theory, shaving weeks off traditional shipping routes. On paper, it was a story about efficiency. In strategic terms, it was about timing. Much like politics, arriving early matters. Especially when the route, the rules and the traffic are still undefined. For years, global politics has trained us to watch the loud moments: warships in the Taiwan Strait, sanctions announced at news conferences, leaders trading
The saga of Sarah Dzafce, the disgraced former Miss Finland, is far more significant than a mere beauty pageant controversy. It serves as a potent and painful contemporary lesson in global cultural ethics and the absolute necessity of racial respect. Her public career was instantly pulverized not by a lapse in judgement, but by a deliberate act of racial hostility, the flames of which swiftly encircled the globe. The offensive action was simple, yet profoundly provocative: a 15-second video in which Dzafce performed the infamous “slanted eyes” gesture — a crude, historically loaded caricature of East Asian features used in Western
Is a new foreign partner for Taiwan emerging in the Middle East? Last week, Taiwanese media reported that Deputy Minister of Foreign Affairs Francois Wu (吳志中) secretly visited Israel, a country with whom Taiwan has long shared unofficial relations but which has approached those relations cautiously. In the wake of China’s implicit but clear support for Hamas and Iran in the wake of the October 2023 assault on Israel, Jerusalem’s calculus may be changing. Both small countries facing literal existential threats, Israel and Taiwan have much to gain from closer ties. In his recent op-ed for the Washington Post, President William
A stabbing attack inside and near two busy Taipei MRT stations on Friday evening shocked the nation and made headlines in many foreign and local news media, as such indiscriminate attacks are rare in Taiwan. Four people died, including the 27-year-old suspect, and 11 people sustained injuries. At Taipei Main Station, the suspect threw smoke grenades near two exits and fatally stabbed one person who tried to stop him. He later made his way to Eslite Spectrum Nanxi department store near Zhongshan MRT Station, where he threw more smoke grenades and fatally stabbed a person on a scooter by the roadside.
RSS