Global Crisis: Latest Analysis and Proposals

Our latest analysis and proposals have been published by the Washington Post (print edition Sunday) in an article by Peter and Simon entitled “The Next World War? It Could Be Financial.” If the world’s leading financial powers cannot agree on a coordinated response, it could be “every nation for itself” – a repeat, on a larger scale, of the emerging markets crisis of 1997-98.  We propose six concrete steps that policy makers – beginning with the G7 and IMF meetings this weekend – can take to limit the risks of such an outcome.

Feel free to comment with criticisms or suggestions.

3 responses to “Global Crisis: Latest Analysis and Proposals

  1. I enjoyed the article quite a lot, although I disagree with points 3 and 5. What is most surprising to me is the contradictory nature of what politicians addressing this situation want…that is a. to regulate the financial markets in new and thus far unknown ways and b. to increase lending to levels before the crisis. This is contradictory because the regulation will most likely reveal the toxicity of debts, while increasing lending again would continue inflating a bubble which will have to come down one way or another.

    Lower interest rates, point 3, I know is widely seen as key, however this is a poor way to assign resources. It will not result in increased liquidity without a great deal of government force-pumping, ie., direct loans, which will probably collapse anyhow because the fact of the matter is that people are overdrawn and have been juggling debts for some time now. Technically, interest rates should reflect the REAL cost of money, not what politicians want.

    Point 5 is moot, bloomberg’s is putting a price tag of 2 trillion dollars on the 2008 deficit right now, so government is already doing a hell of a lot more than a 1% expansion, we’re talking like a 20% of GDP expansion. In fact, the thing may get so bad we could be talking revaluation via currency collapse, ie., the dollar crashes. I think this will happen when people start to realize the percentage of municipal bonds financed on real estate taxes and the lack of transparency in this 2.6 trillion dollar market.

  2. Good proposals, but I think the “world war” paradigm is a bit misplaced. Also, I disagree with this: “Actions by one country alone, and the current pattern of small steps, are no longer credible enough to change the tide …” If your proposals are implemented by the United States, and only the United States, your proposals will still work. There is only one indispensable actor in this world crisis — the one who established the political framework that provides for global financial markets in the first place — the US. This is a political contest more than an economic one: the credibility of America’s commitment to protect the interests of merchants and investors over the interests of others is what is being challenged.

    Your plan is a massive redistribution of resources toward protecting commercial interests that, if successful, settles that political challenge. It need only be implemented unilaterally here, and the EU and everyone else will follow. Why? Because even without the re-establishment of a private market for money, US Treasury securities will still be the world’s best political commitment to protect the purchasing power of money, and foreign investment must still flow more here than elsewhere. Europe will be obligated to follow suit.

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