11 October 2008
For Personal Use Only
“The global economy is in its fifth year of robust growth,” began the statement from Alistair Darling and his fellow finance ministers from the G7 rich nations in October 2007. Sure, the credit crunch was already biting and Northern Rock was hooked up to government life support, but the men and women running the world’s most powerful economies were glass-half-full types. “We have acted resolutely to protect the systemic stability of global financial markets”, they said, and concluded that the outlook was one of “strong global fundamentals” and “well-capitalised financial institutions”.
Those same oracles are meeting again this weekend in Washington, except this time there is no room for self-delusion. There are two types of G7 summit. The first are exercises in back-slapping. This one must fall into the second category: as with the Gleneagles commitment in 2005 to boost aid to Africa, or the 1985 Plaza accord to weaken the dollar and so boost the US economy, leaders need to come up with bold action — now. They have time, just, and an almost intolerable amount of pressure: if rich nations cannot agree this weekend on a plan to stem the banking crisis, the panic seen in financial markets yesterday will be nothing compared to what happens on Monday.
What should a rescue plan look like? There are two essential preconditions. First, it must be global. So far, only the US and UK have announced a full-blown scheme. But this is a global crisis that demands a global solution. Second, any announcement must have meat, rather than bare bones. Diplomacy is often a game of holding statements and consensual platitudes; this time, these will have worse than no effect. Instead, a timetable should set out the steps to be taken by all countries, and when they will take them.
If there is a saving grace in this bleak situation, it is this: different governments need not do different things; they need only do the same things. That is surely easier to manage, especially with the powerful incentive that countries which stand apart are likely to be picked off by financial markets. The common steps this paper would suggest start with an unlimited guarantee on deposits in domestic banks. Such assurances have been undermined by the uncertainty over how nearly bankrupt Iceland will redeem its savers’ money. Nevertheless, they are an essential way of stemming panic among bank customers and for governments to show voters that their interests are being protected. As George Bush remarked yesterday afternoon, “anxiety can feed anxiety” — it is essential that governments soothe that anxiety. Officials should also be prepared to suspend trading in securities in the banking and insurance sectors. The wild swings seen yesterday on stockmarkets surely make any bank rescue as hard as standing on the sea.
The next move is for each treasury to call in their most important banks, work out which are not viable, and wind them up. Most of the other institutions will need capital injections, which governments should give in return for equity stakes, and conditions that executives do not throw away capital on bonuses and dividend payments. Officials also have to increase liquidity by underwriting all lending between banks. Finally, there needs to be action to boost the wider economy. As it is, the best case now looks like a global recession next year. As that outlook gets worse, individuals and businesses will default on their loans, and the banking crisis will intensify. Big central banks should cut interest rates again this week, by half a percentage point or more. And governments must start raising public spending or cutting taxes. These suggestions are aimed at the short term, at restoring stability to banks rather than reforming them. They certainly do not replace an overhaul of the financial system. But that must come later. The priority now is to stop a financial crisis turning into a depression.
Filed by Marina Garbutt under Global Financial Crises
