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18.10.2008 Business & Finance

The Global Financial Meltdown

By Dr Vladimir Antwi-Danso -

Afew weeks ago the whole world started panicking, because the US finally conceded the fact that  there was a credit crunch which was adversely affecting her economy. President Bush quickly announced a $700 billion bailout plan and asked Congress to pass a bill. Congress did. He has signed it into law.

Many thought that this was a US affair. In our last piece a few weeks ago, we warned that such financial meltdowns have global contagion effects. We cited several examples: Mexico (1982 and 1994); Korea (1997) etc. Many are now likening the current crisis to the Great Depression of 1929-33. To some extent, they are similar.

While the Great Depression was as a result of competitive devaluation in a fixed exchange regime, the current crises from 1982 onwards are within a floating regime and are more devastating because of the intensification of globalization.

The period prior to the Great Depression could allow for devaluation in order to stimulate growth. In such a setting, there would be no credit crunch; entrepreneurs would have access to cheaper credit, retool their enterprises and produce at cheaper costs.

 Exports would then be cheaper and imports dearer.

 This would enhance the balance-of-payments (BOP) position for the devaluing country.

Unfortunately, this economic wisdom was profusely abused. Indiscriminate and/or competitive devaluation rather created a credit squeeze – a kind of beggar-thy-neighbour syndrome – and the whole global financial system virtually crumbled.  

This current crisis, on the other hand, is as a result of the lack of coordination of (and insipid belief in) the market. Particularly, the liberalization of capital accounts under the floating system means that money flows freely among markets.

The gullibility of the likes of the 'Wall Street' caused a feeling of 'making more, if you push more'. The 'Housing bubble' in the US was the first sign that something was amiss.

In our last piece, we warned that the crisis was going to be felt throughout the world. We predicted also that it might take a minimum of 18 months for things to start normalizing.

This means that things are not going to be instant, in spite of President Bush having signed the bill into law. Continuing fear and uncertainty may cause recovery to be slow.

Already, markets all over the world have gone down, some as high as by 40%. The average is said to be 27%. This indeed, shows that there is a global financial turbulence.

In Brazil, Japan, China, Hungary, Russia, and the UK, market reports show downward trends.

Already, some banks in Europe and elsewhere have developed cracks from the meltdown. In Germany, HYPO-Real Estate (one of the largest savings banks in Europe) threw in a distress call, which also created intense panic.

The German government initially drew up its own bailout plan via a 35 billion Euro infusion. A consortium of banks was to facilitate this plan. The banks pulled out. The said amount was even said to be inadequate.

When KFW bank threatened to announce bankruptcy, the government had to come out to assure the public that it would ensure the safety of all savings.

A 400 billion Euro roll out is being contemplated. The German Chancellor meanwhile, has promised up to a trillion Euro bailout. People do not believe her.  

The situation in Europe caused President Sarkozy to call a high-level meeting of European leaders in Paris. The European Central Bank (ECB) is to frontload 25 billion Euros for small-scale businesses.

As at the time of writing this piece, Europe has agreed to make available some $2.3 trillion to ensure that economies in Europe do not collapse.  Meanwhile, Ireland, the Netherlands, Belgium, have all announced measures to salvage their economies from collapse.

 Ireland, for instance has announced unlimited savings guarantee. Some feel that this measure is 'anti-market', saying that it may entice Europeans to rush savings to Irish banks.

In far away Iceland most banks are folding up, causing the government to step in, in the form of nationalization. A unique electronic banking system of Iceland enticed most British, German, and Russian citizens to save in Iceland.

The meltdown threatens loss of savings and Premier Brown has had to assure British citizens that he was going to do everything possible to ensure that they did not lose their savings.

There is a general feeling that something should be done about the global financial system, even as we find solution to the current crisis.

At the said meeting in Paris, the consensus was that “there is need to clean up the system and ensure non-occurrence of such for the future.” Europe, therefore, agreed to set up a College of Regulators. In Latin America and in the Caribbean meetings of Heads of State have been held.

 In the US itself similar calls are being made: the slogan is 'For the bailout to work the market must mend.' Meanwhile, the Group of Seven (G-7) and also the World Bank and IMF are having a series of meetings to see how to coordinate global finance.

Incidentally, this seems an indictment of the IMF, since one of the cardinal remits at its inception was the coordination of the global financial system. They seem to have failed, hence the various crises.

 Robert Zoellick, the President of the World Bank, has called for the 'modernization of the multilateral system and markets', since we cannot turn the clock of globalization back. There, in all these, seems to be one consensus: the need for a new global financial and monetary architecture!

The beauty of knowing all these is that it helps to understand the global political economy so that one could steer the affairs of one's own country well.

I wonder if our politicians back home, aspiring for power, are learning. First, is the beauty of seeing a bi-partisan approach to the resolution of the crisis in the US and elsewhere.

Note that more Democrats (176) voted for President Bush's bailout bill, with only few (63) of them (Democrats) voting against. Majority of the Republicans (President Bush's party) rather voted against the bill. Any lesson? Could any opposition party in Ghana do this?

 Second, the rallying of Heads of State and Government in Europe and elsewhere to try and shoot the crisis is heart-warming.

Hardly has any of our aspirants talked about the global economy and how they would deal with it.

None has spoken about integration (which I think is a sine-qua-non to our development in Africa).

In spite of the flood of realities and imperatives, flowing from the global system, most of them are still preaching neo-patrimonialism.

 And most of their quack followers, looking for jobs for themselves, are also barking hoarse in their 'kerosene' politics and promising easier life for all.

Instead of mainstreaming knowledge about the domestic and global economies, they are telling lies and preaching free lunch sermons. Instead of preaching a 'hands-on-deck' attitude to national problems, they are preaching and warning about an apocalypse.

Dear reader, think well about the happenings around the world and make informed choices, because if there is a meltdown in Ghana, nobody is going to save you.

When the BICC Bank (or what name was it?) collapsed worldwide, people elsewhere got their savings back Ghanaians did not. Didn't we have a government in power then?

PS: I send you this piece from far away Namibia, a lovely and peaceful country. I'll be here for a few weeks and then move to South Africa for some days. I shall surely be back to cast my vote. You too, vote calmly and very wisely, so that the following day you may hear the cockerel crow. Stay blessed!