Tuesday, February 17, 2009

Coping with global crisis

The global financial crisis of 2008–2009 is an ongoing major financial crisis. It became prominently visible in September 2008 with the failure, merger, or conservatorship of several large United States-based financial firms. The underlying causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.
Beginning with failures of large financial institutions in the United States, it rapidly evolved into a global credit crisis, deflation and sharp reductions in shipping resulting in a number of European bank failures and declines in various stock indexes, and large reductions in the market value of equities (stock) and commodities worldwide. The credit crisis was exacerbated by Section 128 of the Emergency Economic Stabilization Act of 2008 which allowed the Federal Reserve System to pay interest on excess reserve requirement balances held on deposit from banks, removing the longstanding incentive for banks to extend credit instead of hoard cash on deposit with the Fed. The crisis led to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, which further accelerated the liquidity crisis, and a decrease in international shipping and commerce. World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears but the crisis is ongoing and continues to change, evolving at the close of October into a currency crisis with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund. The crisis was triggered by the subprime mortgage crisis and is an acute phase of the financial crisis of 2007–2009.

Since the global financial crisis started mainly in the United States, ways, actions and strategies must start also in the US. Let me cite some ways of coping with this global dilemma that the US had already started or should have started.

The Federal Reserve, Treasury, and Securities and Exchange Commission took several steps on September 19 to intervene in the crisis. To stop the potential run on money market mutual funds, the Treasury also announced on September 19 a new $50 billion program to insure the investments, similar to the Federal Deposit Insurance Corporation (FDIC) program. Part of the announcements included temporary exceptions to section 23A and 23B (Regulation W), allowing financial groups to more easily share funds within their group. The exceptions would expire on January 30, 2009, unless extended by the Federal Reserve Board. The Securities and Exchange Commission announced termination of short-selling of 799 financial stocks, as well as action against naked short selling, as part of its reaction to the mortgage crisis.

The US must work quickly in a bipartisan fashion to resolve this crisis and restore its financial sector so capital is flowing again and it can avert an even broader economic catastrophe. It also should recognize that economic recovery requires the US to act, not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America.

Even if the Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects some basic principles.

• No blank check. If the US grants the Treasury broad authority to address the immediate crisis, it must insist on independent accountability and oversight. Given the breach of trust it had seen and the magnitude of the taxpayer money involved, there can be no blank check.

• Rescue requires mutual responsibility. As taxpayers are asked to take extraordinary steps to protect US financial system, it is only appropriate to expect those institutions that benefit to help protect American homeowners and the American economy. American people cannot underwrite continued irresponsibility, where CEOs cash in, regulators look the other way. The US cannot abet and reward the unconscionable practices that triggered this crisis. It has to end them.

• Taxpayers should be protected. This should not be a handout to Wall Street. It should be structured in a way that maximizes the ability of taxpayers to recoup their investment. Going forward, the US needs to make sure that the institutions that benefit from financial insurance also bear the cost of that insurance.

• Help homeowners stay in their homes. This crisis started with homeowners and they bear the brunt of the nearly unprecedented collapse in housing prices.

• A global response. This is a global financial crisis and it requires a global solution. The United States must lead, but it must also insist that other nations, who have a huge stake in the outcome, join the US in helping to secure the financial markets.

• Main Street, not just Wall Street. The American people need to know that they should feel the great sense of urgency about the emergency on Main Street as they do the emergency on Wall Street. American leaders must extend their hands in supporting an emergency economic plan for working families — a plan that would help folks cope with rising gas and food prices, save one million jobs through rebuilding schools and roads, help states and cities avoid painful budget cuts and tax increases, and provide retooling assistance to help ensure that the fuel-efficient cars of the future are built in America.

• Build a regulatory structure for the 21st century. While there is not time in a week to remake US regulatory structure to prevent abuses in the future, Americans should commit themselves to the kind of reforms. They need new rules of the road for the 21st century economy, together with the means and willingness to enforce them.

The bottom line is that America must change the economic policies that led it down this dangerous path in the first place. For the last eight years, America had an 'on your own-anything goes' philosophy in Washington and on Wall Street that lavished tax cuts on the wealthy and big corporations; that viewed even common-sense regulation and oversight as unwise and unnecessary; and that shredded consumer protections and loosened the rules of the road. Ordinary Americans are now paying the price.
(Note: I do not claim the originality of this text.