This could be the turning point in the global financial crisis (GFC) that began in Fall 2008. Much like the August, when Mexico’s financial crisis (the climax of the long Latin American debt crisis) forced the Federal Reserve to loosen monetary policy, igniting the long disinflationary growth period that ran (with two light interruptions) until 2007.
We might see this soon on a global scale if a market firestorm forces the major Central Banks into large-scale and coordinated action to stabilize the world economy. A change of policy in the ECB would be necessary, as it’s current policy is an incoherent mixture of tight and loose.
If governments remain paralyzed, or attempt to cope individually with a global event, then we might see ugly results. (later addition: Not good to start a recession with weak household balance sheets and 9%+ unemployment).
There will be people cheering for us to lose, advocating inaction with confident assurances that nothing can be done. Let’s hope our leaders do not listen to them. Schumpeter was wrong when he said that “A depression is for capitalism like a good, cold douche.” (Douche in German means “shower”, but it is still bad advice.)
To see the full coverage of the GFC, go to the FM Reference Page Financial crisis – what’s happening? how will this end?
In America today the truth is often easily seen: statements of the obvious or about the inevitable attract the loudest criticism. So it was at the start of the financial crisis, when Rahm Emanuel, Obama’s chief of staff, told a conference of top corporate chief executives in November 2008.
“You never want a serious crisis to go to waste. … Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.” (Source)
The opportunity to enact reforms provide a silver lining to the darkest clouds of a crisis. People briefly recognize the necessity of change, however painful. Iron-strong political coalitions become vulnerable. The public briefly pays attention to our political plumbing.
In September 2008 I said we were on the brink of a disastrous crash in the US economy, and three things were necessary to prevent it (each link goes to a post with detailed recommendations).
- Stabilize the financial system.
- Stabilize the economy.
- Arrange long-term financing for steps #1 and #2 with our foreign creditors.
We did the first, but in a manner that I (naively) didn’t expect. We provided no-strings aid — trillions of dollars in cheap loans, free guarantees, and asset purchases — to the financial sector. With no reforms. Now, as the recession fades, Obama attempts to make minor reforms — and finds this difficult. We’ll have an opportunity to do better in the inevitable next — and similar — crisis.
We did the second, much as I (and others recommended), although on a smaller scale. The major omission was to provide credit to small businesses; the failure to do so made this recession longer and deeper than needed.
The third recommendation was the most important to restore long-term stability to the system. The global financial structure has many large, deep cracks. To name just two: Continue reading
In the third year of the worst recession since the 1930’s many States totter on the brink of catastrophe, after generations of imprudent management. Ahead lie even greater challenges, as employees cash in on their insanely generous pensions. A few charts tell the tale — showing America’s most profligate states — from “The State of California – the road ahead”, Barclays Capital, 17 February 2010: