Posts Tagged ‘financial crisis’

Global Finance – Doha: What Chance of Success?

1 December, 2008

World economic turmoil sets the scene for the UN Conference on Financing for Development in Doha (29 November to 2 December), the most important conference on this topic since the UN’s conference in Monterrey back in 2002. Go here for UN updates.

The last quarter of 2008 has seen a lot of talk-talk on development finance. The long-awaited High Level Forum on aid effectiveness was held in Accra in September as well as the UN’s high level event on the MDGs in New York. Calling an event ‘high-level’ lets the international community claim that progress has been made – just by getting senior people together in one place.

What will Doha bring? Can it make headway against the very strong currents now running through the global financial system? Will rich country donors be able to afford aid? On this and other issues see my WIDER Angle article with George Mavrotas – Development Finance: New Opportunities for Doha. We explore the topic further in our new UNU-WIDER book Development Finance in the Global Economy: The Road Ahead (Palgrave).

Nigel Lawson: No Fiscal Stimulus, Darling

24 November, 2008

You can rely on Nigel Lawson, Chancellor of the Exchequer 1983-89, to go against the conventional wisdom (see his views on climate change here and here, for example). He’s certainly not a member of the “we’re all Keynesians now” group. In today’s FT he argues that monetary policy is the key tool, not fiscal stimulus. Keynes was wrong:

“Britain … recovered faster than any other major nation from the 1930s slump. It did so largely on the basis of cheap money and a balanced budget. Between the slump’s deepest point, in 1932, and 1937 the UK economy grew at an unprecedented 4½ per cent a year. Nor was this due to rearmament spending, which did not start until 1936”.

I await the comments of economic historians on his reading of the 1930s. For the moment let me focus on his central message.

Lawson argues that recapitalizing the banks is the priority. Certainly, deleveraging by the banks has been huge. Nobody can deny that the economy can’t move again until the banks are sorted out. They are the achilles heel of the battered Anglo-Saxon model of capitalism. Today Citgroup got a $300 bn bailout.

But is this enough? It won’t be if deflation sets in. Then the real value of debt will rise, which will punish Britain’s already highly indebted households. Once deflationary expectations take hold, they are very difficult to shift as Japan in the 1990s demonstrated. Then monetary policy becomes next to useless: interest rates cannot be cut below zero.

Not using fiscal policy to stimulate consumer spending is therefore enormously risky. For sure, consumers might save rather than spend (see my previous post). And Britain will face a big tax bill (after the next election). The gilts market might take fright, but for now they are buying (few want equities).

Back to the lessons Lawson draws from the 1930s: if Britain was to revert to a balanced budget then it would have to cut public spending in a recession rather than raise it. This would have its own deflationary effect which, as economic activity fell, would reduce the tax base – thereby requiring a further expenditure cut to maintain a balanced budget. This is not a recipe for achieving economic recovery.

So, Nigel Lawson’s defiance of the Keynesian consensus is brave, but wrong. His recommendation is too risky. The same goes for doing nothing about climate change (on the latter: go here for a debate between Lawson and Oliver Letwin).

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

The New Realities of Philanthrocapitalism

18 November, 2008

BWPI’s Mike Edwards’ book on business-led philanthropy, “Just Another Emperor?” is attracting a lot of attention – especially in the current financial climate. You can follow the debate on OpenDemocracy. More later.

Who to help in the current financial crisis?

29 September, 2008

Who to help in this financial crisis? On the FT web site I argue that the 37 million Americans in poverty (about 12% of the population) should be first in line for help (for US poverty statistics go here).

Many Americans on low-incomes have been sucked into loans that they cannot now service as house prices collape. African Americans will be hit hard (their poverty rate, 24.5%, is twice the average). And the relentless rise in US inequality will continue (see the graph here). The financial services industry feasted for years on selling mortgages to people who wanted to own the roof above their heads. The scandal of teaser-rate mortgages will run and run.

And the financial crisis is causing unemployment to jump. As Ken Rogoff in the FT says:

“A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending”.

The history of financial crises demonstrates two common outcomes. First, bank crises almost always become fiscal crises – as public money has to be used to keep the credit wheels turning. Second, capital gets help first, and labour last (see for instance Mexico’s ‘peso’ crisis of the mid-90s). Will history repeat itself?

US Financial Crisis Hammers the Poor

18 September, 2008

Former IMF chief economist, Ken Rogoff worries that the dollar is headed for another dip in today’s FT (go here). He says:

“If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring”.

Instead the dollar has strengthened over the last month. But he doesn’t think this will continue. Rogoff is worth listening to: over the summer he said a major US financial institution would fail before the end of the year (reported here). And this has now come to pass (with more on the way?).

What does the financial crisis mean for the poor? Earlier in the year we commented on the big rise in the number of people using America’s food banks (see our February and US archives). The US government buys surplus food for distribution through organizations like America’s Second Harvest — and these are facing heavy demand in areas worst hit by the house-price collapse.

Given the US slowdown, unemployment will rise further. With few if any savings, plus the cost of health care (and the fact that many Americans are uninsured), unemployment can quickly push people into poverty. The US prides itself on social mobility (the rags-to-riches story that all those self-help books play upon). But only 6% of children born to parents with a family income at the very bottom move to the very top (see the Economic Mobility Project here). It’s actually a very static society, especially for African Americans.

Unemployment is, in turn, pushing up the default rate in the already hard-pressed mortgage market. This adds to pressure on mortgage-bonds and the balance sheet of the financial sector.

Putting in place effective safety nets for those on low-incomes could help establish a floor under house prices (and thereby indirectly help the dollar, which is Ken Rogoff’s concern). Since many low-income families were lured into mortgages they cannot now afford through so-called ‘teaser rates’ (low interest rates to suck them into debt) they deserve as much help as the banks — if not more.

But we fear that any help will be squeezed out by the fiscal costs of the financial crisis itself (not to mention the continued cost of Iraq: see Joe Stiglitz here on the ‘three trillion dollar war’). And it is very likely that the US will exercise even less voice in international development, since its bilateral and multilateral aid commitments will come under budgetary pressure as any new administration (be it democratic or republican) will focus on domestic priorities first. The bottom line: it’s not just America’s poor who are hammered, but the world’s poor as well.