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
In 1976, the Gang of Four was ousted. The Gang of Four was a leftist political group comprising Chinese Communist Party (CCP) members: Jiang Qing (江青), its leading figure and Mao Zedong’s (毛澤東) last wife; Zhang Chunqiao (張春橋); Yao Wenyuan (姚文元); and Wang Hongwen (王洪文). The four wielded supreme power during the Cultural Revolution (1966-1976), but when Mao died, they were overthrown and charged with crimes against China in what was in essence a political coup of the right against the left. The same type of thing might be happening again as the CCP has expelled nine top generals. Rather than a
Former Chinese Nationalist Party (KMT) lawmaker Cheng Li-wun (鄭麗文) on Saturday won the party’s chairperson election with 65,122 votes, or 50.15 percent of the votes, becoming the second woman in the seat and the first to have switched allegiance from the Democratic Progressive Party (DPP) to the KMT. Cheng, running for the top KMT position for the first time, had been termed a “dark horse,” while the biggest contender was former Taipei mayor Hau Lung-bin (郝龍斌), considered by many to represent the party’s establishment elite. Hau also has substantial experience in government and in the KMT. Cheng joined the Wild Lily Student
When Taiwan High Speed Rail Corp (THSRC) announced the implementation of a new “quiet carriage” policy across all train cars on Sept. 22, I — a classroom teacher who frequently takes the high-speed rail — was filled with anticipation. The days of passengers videoconferencing as if there were no one else on the train, playing videos at full volume or speaking loudly without regard for others finally seemed numbered. However, this battle for silence was lost after less than one month. Faced with emotional guilt from infants and anxious parents, THSRC caved and retreated. However, official high-speed rail data have long
Taipei stands as one of the safest capital cities the world. Taiwan has exceptionally low crime rates — lower than many European nations — and is one of Asia’s leading democracies, respected for its rule of law and commitment to human rights. It is among the few Asian countries to have given legal effect to the International Covenant on Civil and Political Rights and the International Covenant of Social Economic and Cultural Rights. Yet Taiwan continues to uphold the death penalty. This year, the government has taken a number of regressive steps: Executions have resumed, proposals for harsher prison sentences
RSS