Global Financial Meltdown

ACKNOWLEDGMENT
I take the opportunity to express my profound sense of gratitude and respect to all those who helped me through the duration of the project It was a great opportunity for me to work on this project and learn about the subject. I would like to thank my project guide Mr. Rakesh Dahiya, Assistant Manager, Sharekhan Ltd., who has been a constant source of inspiration for me during the completion of this project. He gave me invaluable inputs during my endeavor to complete this project.

Table of content
1. Introduction 2. Causes of Credit Crisis
Global Transmission of the Crisis

5 11
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3. International Response 4. Impact of crisis on trade of goods and services, remittance and tourism and FDI 5. Some Facts and Figures 6. Scale of Crises and Bailouts 7. The financial crisis and wealthy countries 8. Asia and the financial crisis 9. Global Meltdown and its Impact on the Indian Economy Reform and Resistance

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34 44 50 56 59

16.Rethinking economics?

INTRODUCTION

Introduction

A year ago, the prospects for Emerging Economies (EE) looked very promising. There were concerns about the effect of a shallow recession in the United States, but the general perception was that Asia, the largest regional emerging market group, and Latin America, the second largest, as well as other regions were doing well. In a wishful way most thought they had decoupled from the advanced economies, and wealth would grow with few restrictions. Surely, policies had been conducive to significant improvements in fiscal and external balances, with a few exceptions, and international reserves were at record levels. Policymakers felt comfortable. Commodity prices were expected to continue going up, foreign demand, including among emerging market economies, was strong and there was no serious worry about financing as creditworthiness was solid. Problems were hitting only the United States and a few other developed countries. Since then, the financial crisis which the world is suffering most likely has become the worst in the last fifty years. Some analysts consider that its intensity is equivalent to that of the Great Depression of 1929-33. That crisis was the worst of modern times, and reflected previous excesses and subsequent incompetence. Although the comparison with the Great Depression is an exaggeration unjustified by the facts, the damage caused to the world economy is enormous. The complex and wide-ranging interaction between the financial world and the real economy as a result of the present turbulence already has begun to have serious consequences for the emerging economies, and the prospects for a fast recovery are more remote by the day. Whereas the conditions in the financial markets have tended to stabilize from the unsustainable position of September-October of 2008, the real economy is weakening and the prospects for a recovery can only be envisaged for late 2009 or early 2010. In different ways, Emerging Economies were initially able to absorb the initial impact of the crisis on account of the considerable progress in recent years in consolidating economic performance. Nevertheless, this group of countries is experiencing mounting difficulties. The difficulties are significant in Asia and Latin America, but more so in Eastern Europe and Russia, as they were even more dependent on credit and high export prices respectively. The previous sense of strength and invulnerability is now gone. Commodity prices have declined by about one half from their peak; demand for manufactured goods is declining sharply all over
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the world; stock market valuations have declined by about one half or more; and currencies in many emerging countries have depreciated, as capital flows reversed seeking to find a safe heaven. Governments were reasonably careful with their policies, but private enterprises held toxic assets to an unexpectedly large extent, with serious effects for their own financial health as well as that of their countries. The loss of financial wealth is enormous, and the consequences for the economies of the world, will be unfortunately commensurate. The authorities and economic agents were initially taken by surprise by the collapse. Now they are responding to the challenges caused by the rapidly deteriorating external environment. However, there are serious economic and political stumbling blocks that may well cause the recovery to be costly and slow to consolidate. This paper reviews the origins of the current crisis and the impact on emerging market economies, but focuses mainly on Developing Asia, the NICs, and Latin America in the context of the global crisis. While the inclusion of Latin America may seem extemporaneous to some, it is fitting to include it as the region has a GDP of US$4.4 trillion, somewhat larger than that of China, and about 2/3 of that of developing Asia, which has a GDP of US$7 trillion, according to IMF data. No other region comes close to these two areas in terms of size, and common characteristics in terms of development. Furthermore per-capita income in Latin America is more than double that of Developing Asia both in current and PPP terms. The paper also discusses what can be realistically expected in the short and medium term, as financial volatility and recessionary forces may continue to prevail for a while.

The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models werent so vocal, influential and inconsiderate of others viewpoints and concerns.

Recent evolution of the world economic environment

Over the last decade, Asian countries were able to emerge from the serious crisis that had brought many of them down in the late 90s. Helped by the consistent growth of China, and to an increasing extent India, the Asia region witnessed a stellar performance. Con currently, after a period of low economic growth, persistent crises, and high volatility that extended through the 1990s, Latin America made a very strong recovery. Inflation declined; the fiscal accounts and monetary policy showed great strength; international trade boomed; poverty declined; and the external accounts were much sounder than they had been in decades. Within this overall positive picture, not all countries acted in a similarly prudent fashion. The limited initial impact of the financial crisis gave rise to a false sense of security that has now disappeared. The crisis is now in the open, as the impact on the balance of payments and on domestic activity becomes very serious. The adverse terms of trade effect will aggravate the situation, compounded by a massive loss in financial wealth. Economic growth in 2009 may decline by half among developing and emerging economies (Table 1). It is likely to be well below 1% in Latin America; a recession among the newly Industrialized countries of Asia (NICs); and much lower growth rates, even though still in the order of 5% in Emerging Asia, mainly on account of the resiliency of China, and to a lesser extent India. Of course, this is shocking for all the regions that had experienced very strong growth from 2002 onward. Under these conditions, policy makers will need to find a balance between the needs of economic stimulus and of financial stability.

Genesis of the Present Financial and Economic Crisis

The reasons for the current crisis are complex, and are linked to the financial market deterioration of the last 20 months or so, after a period of extraordinary growth but fraught with dangers that were not anticipated by most even a few months ago. For four years through the summer of 2007, the global economy boomed. Global GDP rose at an average of about 5 percent a year, its highest sustained rate since the early 1970s. About three-fourths of this growth was attributable to a broad-based surge in the emerging and developing economies. Inflation remained generally contained, even if with some upward pressures. Prosperous stage that using an abused word, entailed a new economic paradigm. The value of financial and real assets was growing without a perceptible limit, and commodities had reached new and sustainable heights. Concurrently, the value of financial assets rose sharply, as described in further detail below. The most important factor behind the increasing imbalances was the emergence of growing imbalances among the main economies of the world. The US, with low rates of savings, embarked in consumption binge and a growing fiscal deficit, experienced growing external current account deficits. These were financed by the surpluses of oil producing countries, China, Japan, and to a lesser extent Europe and Latin America. These imbalances grew rapidly, but markets did not respond significantly before 2007. However, the US dollar started to weaken in international markets and there were growing signs of impending problems. As stated very precisely by Jack Boorman, these trends were further complicated by an increasingly integrated global trading and financial system which magnified and accelerated the transmission process; inadequate regulation and supervision of national financial systems and fragmentation of global regulation; weak surveillance by the IMF and other multilateral organizations; and aggravated by weak and uncoordinated policy responses to the initial signs of trouble in the financial system responses that, as noted below, in many instances did more to shake confidence than to instill a sense that policy was up to the task of dealing with the banking system crisis and the impact on the real economy.

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CAUSES OF CREDIT CRISES

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Causes of the Credit Crisis

In the midst of the most serious financial crisis in a generation, some claim that deregulation is entirely to blame. This is simply not true and more importantly serves to grossly oversimplify a problem whose roots run deep and involve myriad actors and issues. The simple truth is that many share the blame, and pointing to just one person or organization does a disservice to the American people. In a time of crisis, the American people cannot afford the same old partisan finger pointing; they need and deserve real, non-partisan oversight. We need a series of hearings that will focus on the root causes and how we can fix a system in order to avoid financial meltdowns in the future. This minority staff analysis attempts to objectively explore the causes of the financial crisis we are in and how companies like Lehman Brothers and AIG contributed to this crisis. The current credit crisis is a complex phenomenon with its roots in a number of places involving a myriad of people and institutions. Key players and institutions include Members of Congress, well-respected members of Republican and Democratic administrations, the Federal Reserve Board, Fannie Mae, Freddie Mac, the Department of Housing and Urban Development (HUD), the Securities and Exchange Commission (SEC), the major private sector credit rating agencies, banks, mortgage brokers, and consumers. There is no single issue or decision one can trace as a cause of the current financial crisis; rather it was multiple decisions and issues involving many actors over time that led us to where we are today. However, we can point to organizations that contributed greatly to the problem and how their role was the catalyst for others to become involved and eventually fail. Fannie Mae and Freddie Mac fall into this category. They were the central cancer of the mortgage market, which has now metastasized into the current financial crisis. With the help of a loose monetary policy at the Federal Reserve, an over-reliance on inaccurate risk assessment and a fractured regulatory system, this cancer spread throughout the financial industry. A few key elements are critical in understanding how we got to where we are today.

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By 2005, Federal Reserve Chairman Alan Greenspan was so concerned that he characterized the concentration of systemic risk inherent in the ever-growing portfolios of Fannie and Freddie as, placing the total financial system of the future at a substantial risk. Recent events have unfortunately proved him right. The transformation of Fannie Mae and Freddie Mac into the Affordable Housing Center was a laudable goal, but to push predatory subprime lending to unspeakable heights and to encourage questionable lending practices believing housing prices would continue to soar was beyond reason. The politicization of Fannie Mae and Freddie Mac over the last decade seriously undermined the credibility of the organizations and prevented their restructuring and reform, with Democrats viewing any attempt at curtailing their behavior as an attempt at curtailing affordable housing. Between 1998 and 2008, Fannie and Freddie combined spent nearly $175 million lobbying Congress, and from 2000 to 2008 their employees contributed nearly $15 million to the campaigns of dozens of Members of Congress on key committees responsible for oversight of Fannie and Freddie. Those who opposed the restructuring of Fannie Mae and Freddie Mac were unwittingly helping to build a house of cards on risky mortgage backed securities. The motivations for Fannie Mae and Freddie Mac to gamble with taxpayer money on bad nonprime mortgage bets was not entirely a matter of good intentions gone awry. Greed and corruption were unfortunately part of the equation as well. The size and growth of Fannie Mae and Freddie Mac leading up to their collapse were nothing short of astonishing. From 1990 to 2005, Fannie Mae and Freddie Mac grew more than 944% to $1.64 trillion, and their outstanding liabilities grew 980% to $1.51 trillion. These liabilities were equal to 32.8% of the total publicly-held debt of the U.S. Government, which in 2005 stood at $4.6 trillion.

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Lehman Brothers, AIG and the Challenges of Statistical Risk Modelling

Lehman Brothers didnt cause this mess but it certainly jumped head first into trying to make money on securitizing mortgage-backed instruments. They followed on the heels of Fannie Mae and Freddie Mac and for precisely the same reasons. If we understand the initial cause of the cancer at Fannie and Freddie, then we can understand how it metastasized to Lehman Brothers, Wachovia, Countrywide, and beyond. AIG is somewhat different; bad management decisions were made in thinking that the mortgage-backed securities and derivatives could be insured. Yet underlying its bad decisions was the same mistaken reliance on sophisticated but inaccurate computer models, trusting the rating agencies were accurate and that Fannie Mae and Freddie Mac couldnt possibly fail.

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Regulation and the Credit Crisis

Democrats are wrong in insisting that de-regulation is the primary cause of the financial crisis. Deregulation is not the problem, rather it is the fractured regulatory system that has banks, investment institutions, mortgage brokers, and insurance companies all being overseen by different and often competing federal and state agencies. The problem is a lack of coherent regulatory oversight that has led mortgage brokers and lending institutions to write questionable loans and investment institutions to play fast and loose with other peoples money in purchasing bad mortgage-backed assets. The words regulation and deregulation are not absolute goods and evils, nor are they meaningful policy prescriptions. They are political cant used to describe complex policy discussions that defy simplistic categorization. The key to successfully regulating markets is not to either create more or less regulation in an unthinking way. Government needs to design smart regulations that align the incentives of consumers, lenders and borrowers to achieve stable and healthy markets.

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Credit Rating Agencies and the Practice of Rating Shopping

Some firms that bundled subprime mortgages into securities were engaging in rating shopping - picking and choosing among each of the three credit rating agencies in order to find the one willing to give their assets the most favorable rating. Rating agencies willing to inflate their ratings on subprime mortgage-backed securities lobbied Congress to prohibit notching - the downgrading of assets that incorporate risky, unrated assets - by their competitors, on the grounds this constituted an anti-competitive practice. Unfortunately, the Republican Congress was swayed by this argument and codified it in law.

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Mortgage Markets: A Primer

Prospective homebuyers apply for mortgages from primary market lenders such as banks, thrifts, mortgage companies, credit unions, and online lenders. Primary lenders evaluate borrowers ability to repay the mortgage based on an assessment of risk that combines such factors as income, assets and past performance in repaying loans. If a borrower does not meet the minimum requirement, the borrower is refused a loan. Prime mortgages are traditionally the gold standard and go to borrowers with good credit who make down payments and fully document their income and assets. Borrowers with poor credit and/or uncertain income streams represent a higher risk of default for lenders and therefore receive subprime loans. Subprime loans have existed for some time but really took off in popularity around 1995, rising from less than 5% of mortgage originations in 1994 to more than 20% in 2006. Borrowers who fall in between prime and subprime standards who may not be able to fully document their income or provide traditional down payments are sometimes referred to as near-prime borrowers. They generally can apply only for Alternative-A (Alt-A) mortgages. Starting in 2001, subprime and near-prime mortgages increased dramatically as a proportion of the total mortgage market. These mortgages increased from only 9% of newly originated securitized mortgages in 2001 to 40% in 2006.

Subprime borrowers, in addition to being below the standard risk threshold lenders traditionally deemed creditworthy for mortgages, were increasingly taking advantage of socalled alternative mortgages that further increased the risk of default. For example, low- or
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zero-down payment mortgages permit borrowers who cannot afford the traditional 20% down payment on a house to still receive a loan. Instead some mortgages allow them to pay 10%, 5%, or even 3% of the purchase price of the home. The riskiest loans even allow borrowers to pay no money down at all for 100% financing. Another option is to allow borrowers to take out a piggyback or silent second loan - a second mortgage to finance the down payment. This is possible because the larger first mortgage means some lenders give borrowers a more favorable rate on the second mortgage. Interest-only mortgages are another alternative type that allows borrowers to for a time pay back only interest and no principal. However, either the duration of the mortgage must be extended or the payments amortize the remaining principal balance over a shorter period of time, increasing the monthly payment, and ultimately the total size of the loan, a borrower must repay. Negative amortization mortgages are even riskier, allowing borrowers to pay less than the minimum monthly interest payment, adding the remaining interest to the loan principal and again increasing the payments and size of the loan. Adjustable rate mortgages (ARMs) are the most common of the alternative mortgages. ARMs offer a low introductory mortgage rate (the cost of borrowing money for a home loan; it is generally related to the underlying interest rate in the macro economy) which then adjusts in the future by an amount determined by a pre-arranged formula. There are different formulae used to determine the new mortgage rate on an ARM, but in general one can think of these new rates as being related to the performance of the U.S. economy. If interest rates go down during the introductory period of the ARM, the adjusted mortgage rate will be lower, meaning the borrowers monthly payment will go down. If interest rates go up, the borrowers monthly payment will be larger. The prevalence of ARMs as a percentage of the total mortgage market increased dramatically during the housing bubble, from 12% in 2001 to 34% in 2004. Unlike other alternative mortgages, however, there are sound reasons for borrowers to take out ARMs, under certain macroeconomic conditions. In 1984, for example, 61% of new conventional mortgages were ARMs. However, this was a rational response to the very high interest rates at that time. High interest rates translate into high mortgage rates. This meant that borrowers at that time were willing to bet that when their mortgage rates adjusted, they were likely to adjust downward due to falling interest rates. This was a sensible bet and one that turned out to be correct.
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From 2001 to 2004, however, interest rates were abnormally low because the Federal Reserve led by Chairman Alan Greenspan lowered rates dramatically to pump up the U.S. economy following the attacks of September 11, 2001. Correspondingly, from 2004 to 2006, mortgage rates on 30-year fixed-rate mortgages were around 6%, relatively low by historical standards. Borrowers responding only to these macroeconomic conditions would have been wise to lock in these rates with a traditional 30-year fixed-rate mortgage. The continuing popularity of ARMs, at least until about 2004, relates in part to the abnormally wide disparity between short- and long-term interest rates during this period. Since ARMs tend to follow short-term rates, borrowers could get these mortgages at even lower costs and, as long as they were confident that housing prices would continue to rise, plan on refinancing before their ARMs adjusted upward.

Low short-term rates until 2004 are only part of the puzzle, however. By 2005 short-term interest rates were actually rising faster than long-term rates, yet ARMs remained very popular. By 2006 housing prices had started to slow significantly and yet introductory periods remained popular. In the words of a report by the Congressional Research Service, The persistence of nontraditional terms could be evidence that some borrowers intended to sell or refinance quickly - one indicator of speculative behavior. However, the report goes on to note that, in addition to speculation, alternative mortgages were marketed as affordability products to lower income and less sophisticated borrowers during the housing boom. Some other force was clearly at work.

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The Role of Fannie Mae and Freddie Mac in Creating the Credit Crisis Successive Congresses and Administrations have used Fannie Mae and Freddie Mac as tools in service to a well-intentioned policy to increase the affordability of housing in the United States. In the process, the U.S. Government created an incentive structure for Fannie and Freddie to facilitate the extension of risky nonprime and alternative mortgages to many borrowers with a questionable ability to pay these loans back. Ultimately, Fannie and Freddie may have purchased or guaranteed up to $1 trillion of risky nonprime mortgages. This, along with a healthy dose of unethical and corrupt behavior by the management of Fannie Mae and Freddie Mac, has contributed perhaps more than any other single factor to the growth of the subprime housing bubble from 2005 to 2007, which in turn was the root cause of the current financial crisis. In the mortgage market, primary lenders may choose to hold a mortgage until repayment or they may sell it to the secondary mortgage market. If the primary lender sells the mortgage, it can use the proceeds from the sale to make additional loans to other homebuyers. This increase in the funding available to mortgage lenders to lend was the goal behind the creation of Fannie Mae and Freddie Mac. Prior to the existence of the secondary mortgage market, there was no national U.S. mortgage market. Instead, the mortgage industry was mainly concentrated in urban centers, leaving broad swaths of the country unable to afford home financing. In response, Congress created the Federal National Mortgage Association, or Fannie Mae, in the National Housing Act of 1934 as a purely public agency. After a number of legislative iterations, Fannie Mae morphed into a private company, a government-sponsored enterprise (GSE), with no federal funding by 1970.

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Securitisation and Subprime crisis

The sub prime crisis came about in a large part of financial instruments such as securitisation. Where bank would pool their various loans into sellable assets, thus off loading risky loans on to others (For banks, millions can be made in money earning loans, but they are tied up for
decades. So they turned into securities. The security buyer gets regular payments from all those mortgages; the banker off loads the risk. Securitization was seen as perhaps the greatest financial innovation in the 20th century). As BBCs former economic editor and presenter, Evan Davies noted in a documentary called The City Uncovered with Evan Davis: Banks and How to Break Them (January 14,2008), rating agencies were paid to rate these products (risking a conflict of interest) and invariably got good ratings,encouraging people to take them up.

Starting in Wall Street, others followed quickly. With soaring profits, all wanted in, even if it went beyond their expertise. For Example, Banks borrowed even more money to lend out so they could create more securitization. Some banks didnt need to rely on savers as much then, as long as they could borrow from banks and sell those loans on as securities; bad loans would be the problem of whoever bought the securities. Some investment banks like Lehman Brothers git into mortgages, buying them in order to securitize them and then sell them on. Some banks loaned even more to have an excuse to securitize those loans. Running out of whom to loan to, banks turned to the poor; the subprime, the riskier loans. Rising house prices led lenders to think it wasnt too riski; bad loans ment repossessing high-valued property. Subprime and self-certified loans (sometimes dubbed liars loans) became popular, especially in the US. Some banks even started to buy securities from others. Collateralized Debt Obligations, or CDOs, (even more complex forms of securitization) spread the risk but were very complicated and often hid the bad loans. While things were good, no one wanted bad news. High street banks got into a form of investment banking, buying, selling and trading risk. Investment banks, not content with buying, selling, and trading risk, got into home loans, mortgages, etc without the right controls and management.
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Derivatives didnt cause this financial meltdown but they did accelerate it once the subprime mortgage collapsed, because of the interlinked investments. Derivatives revolutionized the financial markets and mitigating risk. This will be very hard to do. Despite the benefits of a market system, as all have admitted for many years, it is far from perfect. Amongst other things, experts such as economists and psychologists say that markets suffer from a few human frailties, such as confirmation bias ( always looking for facts that support your view, rather than just facts) and superiority bias ( the belief that one is better than the others, or better than the average and can make good decisions all the time). Trying to reign in these facets of human nature seems like a tall order and in the meanwhile the costs are skyrocketing.

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Global Transmission of the Crisis

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Global Transmission of the Crisis

The financial crisis that erupted in August 2007 after the collapse of the U.S. subprime mortgage market entered a tumultuous new phase in September 2008. These developments badly shook confidence in global financial institutions and markets. Most dramatically, intensifying solvency concerns triggered a cascading series of bankruptcies, forced mergers, and public interventions in the United States and Western Europe, which eventually resulted in a drastic reshaping of the financial landscape. When the real estate bubble busted in the US and Europe (the UK and Spain come to mind), investors moved to commodities, where experts expected a continuous increase in prices. The commodity bubble peaked in mid 2008, with a subsequent collapse, that only decelerated by the end of the year. In the second half of the year commodity prices declined by some 45%; in particular losses were large in the case of metals and oil (Chart 1).

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Chart 1: Evolution of commodity Prices (2005=100)

Source: IMF: Commodity Prices; .

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International Response

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International Response

The national rescue operations have been followed by major swap transactions between the Federal Reserve of the US and a number of other central banks of industrialized economies, in order to provide sufficient liquidity in response to a steady demand for US dollars. More recently, this was extended to the Central Banks of Brazil, Korea, Mexico, and Singapore, again to support the currencies of those countries in the face of continued pressures in foreign exchange markets at least through end-2008. With high financing requirements, access to the International Financial Institutions has also become imperative. The IMF has already indicated that it will show greater lending flexibility and can mobilize significant resources. In the past, any borrowing had to be based on what was seen as burdensome conditions. The IMF would now provide assistance on the basis of fewer conditions, for countries seen as generally good performers. And conditions would be fewer and more targeted than in the past.7 The creation of the G-20 Summits is another noteworthy development. It follows a group formed in the 1990s to discuss international financial issues, at the ministerial level. Up to now, many decisions had been taken at the level of the G-7/G-8, the important group formed by the largest advanced economies, and Russia. The G-20 includes the G-8 and the largest emerging, newly industrialized economies, including China, India, Korea, South Africa, and in Latin America, Brazil, Mexico and Argentina. This forum reflects better the growing importance of the emerging world and may also open the door to a more representative governance system at the international financial institutions (IFIs). However, over-represented Europe and others will need to accept the realities of the new world and shift their voting power to the new countries, and make IFIs more relevant.

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Impact of crisis on trade of goods and services, remmitace and tourism and FDI

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Impact of crisis on trade of goods and services, remmitace and tourism and FDI
Developments in Trade of Goods and Services

As part of the significant slowdown/decline in world activity, trade volumes are expected to decline for the first time in many yearsas a minimum by 3% according to IMF estimates. The impact will be very different in various areas of the world. Over the last quarter century the volume of world trade had grown at an average rate of 6%, or about double the rate of world output. Asian exports have grown at a rate of 10% and those of Latin America and the Caribbean by some 7%, with a marked transformational impact. The NICs, which have become highly integrated with the rest of the world, recorded an average ratio of Exports to GDP of 71% for the period 2002-07. Developing Asia recorded a ratio of 55%, tempered by the much lower but growing ratios for China (31%) and India (12%) which were clearly dominated by domestic developments. In Asia the ratio of exports to GDP reflected increased volumes of trade, but to some extent also some real depreciation of their currencies. Latin America which had become much more open in the 1990s, registered a stable ratio of exports to GDP of 21% notwithstanding the impact of a strong real appreciation, as export volumes increased significantly over the period. Under these conditions, it would be easy to suggest that the countries that have been most open to international trade may be subject to the greatest shock on account of reduced world demand, thus justifying protectionism. However this should be viewed in a broader light. Countries that opened more vigorously to trade grew the fastest, and benefitted more from global prosperity. It may be the case that they will experience a significant short term loss, as is being observed in Taiwan Province and in Korea. But this is taking place from the vantage point of much higher gains in the past, and with the understanding that the losses, even if large, will be temporary. More significantly, the more open traders may benefit from a more flexible productive structure that allows them to adjust more efficiently. More closed economies, adjusted for their size8, may be more dependent on a few commodities, and will have more difficulty in correcting imbalances as their domestic economies may find a lower productive base to provide for their imports.

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Remittances and Tourism

Two other areas that can be expected to show the impact of the slowdown are remittances and services, like tourism. Remittances over the last fifteen years have become a major channel of prosperity. The merits of increased mobility of large numbers of workers to well-paying jobs in prosperous destinations may be subject to debate. However, the impact of the consequent remittances to their home countries have helped increase prosperity and reduce poverty, particularly in Asia and Latin America- India, Mexico and the Philippines being the largest recipients of workers remittances. Remittances amounted to some US$280 billion in 2008 (some 2% of GDP of the receiving countries), with near US$110 billion to Asia, and US$70 billion to Latin America. These flows have been very stable, and acted as a countercyclical force in the receiving countries.9 However, they are highly sensitive to economic conditions in the countries of employment. With many emigrants working in the US, Europe, and the Middle East, remittances started to fall in 2008, for the first time in a quarter century. The prospects for 2009 are equally dire, with adverse consequences for the well being of many millions of households among developing countries. Tourism is another area of concern. Receipts from tourists are also a significant source of income, particularly for Thailand, Maldives, India and some other countries in South and South East Asia, and Mexico, Central America and the Caribbean, and some countries in South America. Even though transportation costs are declining, tourism from the richer countries has fallen and will continue to do so. With emerging economies, arguably the most dynamic segment of international tourism, also entering into recession the prospects for this segment of economic activity look particularly grim for the near future.

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Foreign Direct Investment

Foreign Direct Investment (FDI) will also suffer in the short run. FDI stocks and flows grew at a very fast rate in recent years, reflecting both the emergence of new countries as origin and destination of capital flows, and rapidly evolving capital markets, which allowed for a sharp increase in available capital within the private sector, and resulting in a decline in lending by International Financial Institutions or IFIs. Most interesting was the change in the composition of these flows. While total FDI directed to developed countries retained the lions share of the total inflows (70% of the total), both Asia and Latin America became increasingly important, even with some volatility in the case of Latin America. (Table 2) Also, the countries of the CSIS and of Eastern and Central Europe began to receive increasing flows. 10 As an illustration of the size of inflows and outflows, table# 2 presents the cumulative inflows and outflows of FDI and portfolio investments for Developing Asia and Latin America for the period 1998-2007. The information is particularly interesting as it shows the large sums of capital outflows from Emerging Economies, as they became increasingly important investors, as opposed to the previous experience when these outflows reflected capital flight. By early 2008 capital flows to developing countries had started to slow down, and these flows fell sharply in the second half of the year reflecting the financial crisis. In the end, cumulative flows for the year were only about one half of those registered in 2007, with sharp declines both in Asia and Latin America. The Institute of International Finance estimates that net private flows to emerging economies declined from a record US$930 billion in 2007 to below US$470 billion in 2008 and to projected flows of only US$165 billion in 2009. Net flows are projected to decline by 80% from their 2007 peak for Emerging Asia, and by 75% for Latin America. This will complicate economic management, as countries deal with weakening external accounts.

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Some Facts and Figures

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Some Facts and Figures

Chart 1
Growth of GDP in Developing Asia, Latin America and the World (Annual percent)

Source: WEO, IMF, ECLAC, .

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Chart 2

Inflation (in %)

Source: WEO, IMF, ECLAC, .

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Chart 3

External Current Account, Fiscal Balance, Exchange Rates and Terms of Trade
Developing and Emerging Asia

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Chart 4

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Chart 5

Foreign Direct Investment: Recipient regions stocks (US$ billions)

1980 World 551

1990 1779 1414 80 365 9 2388

2000 5810 4031 69 1708 17 7948

2006 11999 8454 71 3156 14 11999

Developed Economies 411 Share in Total 75

Developing Economies 140 Share in Total World FDI Stock 9 859

Memorandum Items

Capital Flows (US$ billion;1998-07)2/ FDI Inflows FDI Outflows Portfolio Inflows Portfolio Outflows

Dev Asia 841 -151 127 -102

LATAM 728 -142 170 -103

1/ Adjusted by world export prices 2/2007 values for Asia are estimates

Source: UNCTAD, World Investment Report (2007),

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Chart 6
Growth of GDP in Developing Asia, Latin America and the World (Annual percent)

Source IMF, ECLAC

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Chart 7:
Inflation (in %)

Source: WEO, IMF, ECLAC,

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Chart 8
Selected Countries-stock Market and Exchange Rate changes June-Dec 2008
Stock Market Changes % Exchange Rate Changes %

China Hong-Kong India South Korea Argentina Brazil Mexico Japan Euro Area USA(S&P500)
Sources: Bloomberg, market data

-48 -40 -41 -36 -51 -49 -29 -36 -37 -36

1 1 -13 -20 -13 -31 -26 18 -11 --

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Chart 9

STIMULUS PACKAGES: Selected Countries

Country Announced Amount of Stimulus Gross Debt Public Public Debt, net of International Reserves US Billion, annual China Singapore Indonesia South Korea India Peru Chile Argentina Mexico Brazil USA Japan Germany Great Britain 300 (586) 1/ 6.2 6.3 10.8 8.3 3.2 4.0 3.8 10.8 16.0 800 (1150) 1/ 250 102 30 7.1 3.2 1.3 1.1 0.7 2.5 2.2 1.2 1.1 1.0 5.6 5.2 2.7 1.1 18 92 17 32 58 31 19 59 26 57 38 153 67 44 (% of GDP, 2008) -30 2 5 11 37 1 6 46 18 46 38 128 64 41

1/Estimated expenditure in 2009. Number in parenthesis reflects announced total package Sources: National data; Press Releases; IMF; Eurostat

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SCALE OF CRISES

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The scale of the crisis: trillions in taxpayer bailouts

The extent of the problems has been so severe that some of the worlds largest financial institutions have collapsed. Others have been bought out by their competition at low prices and in other cases, the governments of the wealthiest nations in the world have resorted to extensive bail-out and rescue packages for the remaining large banks and financial institutions. The total amounts that government have spent on bailouts have skyrocketed. From a world credit loss of $2.8 trillion in October 2009, US taxpayers alone will spend some $9.7 trillion in bailout packages and plans, according to Bloomberg, $14.5 trillion, or 33%, of the value of the worlds companies has been wiped out by this crisis. The UK and other European countries have also spent some $2 trillion on rescues and bailout packages. More is expected Many banks were taking on huge risks increasing their exposure to problems.When people did eventually start to see problems, confidence fell quickly. Some investment banks were sitting on the riskiest loans that other investors did not want. Assets were plummeting in value so lenders wanted to take their money back. But some investment banks had little in deposits; no secure retail funding, so some collapsed quickly and dramatically of criticism for betting n the things going badly. In the recent crisis they were criticized for shorting on banks, driving down their prices. Some countries temporarily banned shorting on banks. In some regards, hedge funds may have been signalling an underlying weakness with banks, which were encouraging borrowing beyond peoples means. On the other hand more it continued the more they could profit. The market for credit default swaps market (a derivative on insurance on when a business defaults), for example, was enormous, exceeding the entire world economies output of $50 trillion by summer 2008. It was also poorly regulated. The worlds largest insurance and financial services company, AIG alone had credit default swaps of around $400 billion at that time. A lot of exposure with little regulation. Furthermore , many of AIGs credit default swaps were mortgages, which of course went downhill, and so did AIG. The trade in these swaps created a whole web of interlinked dependencies: a chain only as strong as the weakest link. Any problem, such as risk or actual significant loss could spread quickly. Hence the eventual bailout (now some $150 billion) of AIG by the US government to prevent them failing.
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The effect of this, the United Nations Conference on Trade and Development says in i ts Trade and Development Report 2008 is, as summarized by the Third World Network, that The global economy is teetering on the brink of recession. The downturn after four years of relatively fast growth is due to a number of factors: the global fallout from the financial crisis in the United States, the bursting of the housing bubbles in the US and in other large economies, soaring commodity prices, increasingly restrictive monetary policies in a number of countries, and stock market volatility.The fallout from the collapse of the US mortgage market and the reversal of the housing boom in various important countries has turned out to be more profound and persistent than expected in 2007 and beginning of 2008. As more and more evidence is gathered and as the lag effects are showing up, we are seeing more and more countries around the world being affected by this rather profound and persistent negative effects from the reversal of housing booms in various countries. Kanaga Raja, Economic Outlook Gloomy, Risks to South, say UNCTAD, Third World Network, September 4, 2008

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A Crisis so severe, those responsible are bailed out

Some of the bail-outs have also been accompanied with charges of hypocrisy due to the appearance of socializing the costs while privatizing the profits. The bail-outs appear to help the financial institutions that got into trouble (many of whom pushed for the kind of lax policies that allowed this to happen in the first place). Some governments have moved to make it harder to manipulate the markets by shorting during the financial crisis blaming them for worsening an already bad situation. (It should be noted that during the debilitating Asian financial crisis in the late 1990s, Asian nations affected by short-selling complained, without success that currency speculators operating through hedge funds or through the currency operations of commercial banks and other financial institutionswere attacking their currencies through short selling and in doing so, bringing the rates of the local currencies far below their real economic levels. However, when they complained to the Western governments and International Monetary Fund (IMF), they dismissed the claims of the Asian governments, blaming it on their own economic mismanagement instead.) Other governments have moved to try and reassure investors and savers that their money is safe. In a number of European countries, for example, governments have tried to increase or fully guarantee depositors savings. In other cases, banks have been nationalized (socializing profits as well as costs, potentially.) In the meanwhile, smaller businesses and poorer people rarely have such options for bail out and rescue when they find themselves in crisis. There seems to be little sympathyand even growing resentmentfor workers in the financial sector, as they are seen as having gambled with other peoples money, and hence lives, while getting fat bonuses and pay rises for it in the past. Although in raw dollar terms the huge pay rises and bonuses are small compared to the magnitude of the problem, the encouragement such practices have given in the past, as well as the type of culture it creates, is what has angered so many people.

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A crisis so severe, the rest suffer too

There is the argument that when the larger banks show signs of crisis, it is not just the wealthy that will suffer, but potentially everyone. With an increasingly inter-connected world, things like a credit crunch can ripple through the entire economy. For example, banks with little confidence to lend may lend with higher interest rates. People may find their mortgages harder to pay, or remortgaging could become expensive. For any recent home buyers, the value of their homes are likely to fall in value leaving them in negative equity. In the wider economy, many sectors may find the credit crunch and higher costs of borrowing will lead to job cuts. As people will cut back on consumption to try and weather this economic storm, yet other businesses will struggle to survive leading to further fears of job losses. The real economy in many countries is already feeling the effects. Many industrialized nations are sliding into recession if they are not already there.

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The financial crisis and wealthy countries

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The financial crisis and wealthy countries

Many blame the greed of Wall Street for causing the problem in the first place because it is in the US that the most influential banks, institutions and ideologues that pushed for the policies that caused the problems are found. The crisis became so severe that after the failure and buyouts of major institutions, the Bush Administration offered a $700 billion bailout plan for the US financial system. This bailout package was controversial because it was unpopular with the public, seen as a bailout for the culprits while the ordinary person would be left to pay for their folly. The US House of Representatives initial rejected the package as a result, sending shock waves around the world. It took a second attempt to pass the plan, but with add-ons to the bill to get the additional congressmen and women to accept the plan. However, as former Nobel prize winner for Economics, former Chief Economist of the World Bank and university professor at Columbia University, Joseph Stiglitz, argued, the plan remains a very bad bill: In Europe, starting with Britain, a number of nations decided to nationalize, or partnationalize some failing banks to try and restore confidence. The US resisted this approach at first, as it goes against the rigid free market view the US has taken for a few decades now. Eventually, the US capitulated and the Bush Administration announced that the US government would buy shares in troubled banks. This illustrates how serious this problem is for such an ardent follower of free market ideology to do this (although free market theories were not originally intended to be applied to finance, which could be part of a deeper root cause of the problem). Perhaps fearing an ideological backlash, Bush was quick to say that buying stakes in banks is not intended to take over the free market, but to preserve it. Professor Ha-Joon Chang of Cambridge University suggests that historically America has been more pragmatic about free markets than their recent ideological rhetoric suggests, a charge by many in developing
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countries that rich countries are often quite protectionist themselves but demand free markets from others at all times. While the US move was eventually welcomed by many, others echo Stieglitzs concern above. For example, former Assistant Secretary of the Treasury Department in the Reagan administration and a former associate editor of the Wall Street Journal, Paul Craig Roberts also argues that the bailout should have been to help people with failing mortgages, not banks: The problem, according to the government, is the defaulting mortgages, so the money should be directed at refinancing the mortgages and paying off the foreclosed ones. And that would restore the value of the mortgage-backed securities that are threatening the financial institutions [and] the crisis would be over. So theres no connection between the governments explanation of the crisis and its solution to the crisis. (Interestingly, and perhaps the sign of the times, while Europe and US consider more socialist-like policies, such as some form of nationalization, China seems to be contemplating more capitalist ideas, such as some notion of land reform, to stimulate and develop its internal market. This, China hopes, could be one way to try and help insulate the country from some of the impacts of the global financial crisis.) Despite the large $700 billion US plan, banks have still been reluctant to lend. This led to the US Fed announcing another $800 billion stimulus package at the end of November. About $600bn is marked to buy up mortgage-backed securities while $200bn will be aimed at unfreezing the consumer credit market. This also reflects how the crisis has spread from the financial markets to the real economy and consumer spending. By February 2009, according to Bloomberg, the total US bailout is $9.7 trillion. Enough to pay off more than 90 percent of Americas home mortgages (although this bailout barely helps homeowners).

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A crisis signaling the decline of USs superpower status?

Even before this global financial crisis took hold, some commentators were writing that the US was in decline, evidenced by its challenges in Iraq and Afghanistan, and its declining image in Europe, Asia and elsewhere. The BBC also asked if the USs superpower status was shaken by this financial crisis: The financial crisis is likely to diminish the status of the United States as the worlds only superpower. On the practical level, the US is already stretched militarily, in Afghanistan and Iraq, and is now stretched financially. On the philosophical level, it will be harder for it to argue in favor of its free market ideas, if its own markets have collapsed. Some see this as a pivotal moment. The political philosopher John Gray, who recently retired as a professor at the London School of Economics, wrote in the London paper The Observer: Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably. The era of American global leadership, reaching back to the Second World War, is over The American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. How symbolic that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees. Paul Reynolds, US superpower status is shaken, BBC, October 1, 2008 Yet, others argue that it may be too early to write of the US: The director of a leading British think-tank Chatham House, Dr Robin Niblett argues that we should wait a bit before coming to a judgment and that structurally the United States is still strong. America is still immensely attractive to skilled immigrants and is still capable of producing a Microsoft or a Google, he went on. Even its debt can be overcome. It has enormous resilience economically at a local and entrepreneurial level.
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And one must ask, decline relative to who? China is in a desperate race for growth to feed its population and avert unrest in 15 to 20 years. Russia is not exactly a paper tiger but it is stretching its own limits with a new strategy built on a flimsy base. India has huge internal contradictions. Europe has usually proved unable to jump out of the doldrums as dynamically as the US. But the US must regain its financial footing and the extent to which it does so will also determine its military capacity. If it has less money, it will have fewer forces. Paul Reynolds, US superpower status is shaken, BBC, October 1, 2008

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Europe and the financial crisis

In Europe, a number of major financial institutions failed. Others needed rescuing. In Iceland, where the economy was very dependent on finance sector, economic problems have hit them hard. The banking system virtually collapsed and the government had to borrow from the IMF and other neighbors to try and rescue the economy. In the end, public dissatisfaction at the way the government was handling the crisis meant the Iceland government fell A number of European countries have attempted different measures (as they seemed to have failed to come up with a united response). For example, some nations have stepped in to nationalize or in some way attempt to provide assurance for people. This may include guaranteeing 100% of peoples savings or helping broker deals between large banks to ensure there isnt a failure. The EU is also considering spending increases and tax cuts to be worth 200 billion over two years. The plan is supposed to help restore consumer and business confidence, Shore up employment, getting the banks lending again, and promoting green technologies.

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Asia and the financial crisis

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Asia and the financial crisis

Countries in Asia are increasingly worried about what is happening in the West. A number of nations urged the US to provide meaningful assurances and bailout packages for the US economy, as that would have a knock-on effect of reassuring foreign investors and helping ease concerns in other parts of the world. Many believed Asia was sufficiently decoupled from the Western financial systems. Asia has not had a subprime mortgage crisis like many nations in the West have, for example. Many Asian nations have witnessed rapid growth and wealth creation in recent years. This lead to enormous investment in Western countries. In addition, there was increased foreign investment in Asia, mostly from the West. However, this crisis has shown that in an increasingly inter-connected world means there are always knock-on effects and as a result, Asia has had more exposure to problems stemming from the West. Many Asian countries have seen their stock markets suffer and currency values going on a downward trend. Asian products and services are also global, and a slowdown in wealthy countries means increased chances of a slowdown in Asia and the risk of job losses and associated problems such as social unrest. India and China are the among the worlds fastest growing nations and after Japan, are the largest economies in Asia. From 2007 to 2008 Indias economy grew by a whopping 9%. Much of it is fueled by its domestic market. However, even that has not been enough to shield it from the effect of the global financial crisis, and it is expected that in data will show that by March 2009 that Indias growth will have slowed quickly to 7.1%. Although this is a very impressive growth figure even in good times, the speed at which it has droppedthe sharp slowdownis what is concerning. China, similarly has also experienced a sharp slowdown and its growth is expected to slow down to 8% (still a good growth figure in normal conditions). However, China also has a growing crisis of unrest over job losses. Both have poured billions into recovery packages. Japan, which has suffered its own crisis in the 1990s also faces trouble now. While their banks seem more secure compared to their Western counterparts, it is very dependent on exports. Japan is so exposed that in January alone, Japans industrial production fell by 10%, the biggest monthly drop since their records began.

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Towards the end of October 2008, a major meeting between the EU and a number of Asian nations resulted in a joint statement pledging a coordinated response to the global financial crisis. However, as Inter Press Service (IPS) reported, this coordinated response is dependent on the entry of Asias emerging economies into global policy-setting institutions. This is very significant because Asian and other developing countries have often been treated as second-class citizens when it comes to international trade, finance and investment talks. This time, however, Asian countries are potentially trying to flex their muscle, maybe because they see an opportunity in this crisis, which at the moment mostly affects the rich West. Asian leaders had called for effective and comprehensive reform of the international monetary and financial systems. For example, as IPS also noted in the same report, one of the Chinese state-controlled media outlets demanded that We want the U.S. to give up its veto power at the International Monetary Fund and European countries to give up some more of their voting rights in order to make room for emerging and developing countries. They also added, And we want America to lower its protectionist barriers allowing an easier access to its markets for Chinese and other developing countries goods. Whether this will happen is hard to know. Similar calls by other developing countries and civil society around the world, for years, have come to no avail. This time however, the financial crisis could mean the US is less influential than before. A side-story of the emerging Chinese superpower versus the declining US superpower will be interesting to watch. It would of course be too early to see China somehow using this opportunity to decimate the US, economically, as it has its own internal issues. While the Western mainstream media has often hyped up a threat posed by a growing China, the World Banks chief economist (Lin Yifu, a well respected Chinese academic) notes Relatively speaking, China is a country with scarce capital funds and it is hardly the time for us to export these funds and pour them into a country profuse with capital like the U.S. Asian nations are mulling over the creation of an alternative Asia foreign exchange fund, but market shocks are making some Asian countries nervous and it is not clear if all will be able to commit. What seems to be emerging is that Asian nations may have an opportunity to demand more fairness in the international arena, which would be good for other developing regions, too.
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Global Meltdown and its Impact on the Indian Economy

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Global Meltdown and its Impact on the Indian Economy

Impacts of the US Financial Crisis on India Though in the beginning Indian official denied the impact of US meltdown affecting the Indian economy but later the government had to acknowledge the fact that US financial crisis will have some impact on the Indian economy. The US meltdown which shook the world had little impact on India, because of Indias strong fundamental and less exposure of Indian financial sector with the global financial market. Perhaps this has saved Indian economy from being swayed over instantly. Unlike in US where capitalism rules, in India, market is closely regulated by the government. 1. Impact on stock market The immediate impact of the US financial crisis has been felt when Indias stock market started falling. On 10 October, Rs. 250,000 crores was wiped out on a single day bourses of the Indias share market. The Sensex lost 1000 points on that day before regaining 200 points, an intraday loss of 200 points. This huge withdrawal from the Indias stock market was mainly by Foreign Institutional Investors (FIIs), and participatory-notes. 2. Impact on Indias trade The trade deficit is reaching at alarming proportions. Because of workers remittances, NRI deposits, FII investment and so on, the current deficit is at around $10 billion. But if the remittances dry up and FII takes flight, then we may head for another 1991 crisis like situation, if our foreign exchange reserves depletes and trade deficit keeps increasing at the present rate. Further, the foreign exchange reserves of the country has depleted by around $57 billion to $253 billion for the week ended October 31.(Sivaraman, 2008) 3. Impact on Indias export With the US and several European countries slipping under the full blown recession, Indian exports have run into difficult times, since October. Manufacturing sectors like
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leather, textile, gems and jewellery have been hit hard because of the slump in the demand in the US and Europe. Further India enjoys trade surplus with USA and about 15 per cent of its total export in 2006-07 was directed toward USA. Indian exports fell by 9.9 per cent in November 2008, when the impact of declining consumer demand in the US and other major global market, with negative growth for the second month, running and widening monthly trade deficit over $10 billions. Official statistics released on the first day of the New Year, showed that exports had dropped to $1.5 billion in November this fiscal year, (Sivaraman, 2008) from $12.7 billion a year ago, while imports grew by $6.1billion to $21.5 billion. 4. Impact on Indias handloom sector, jewelry export and tourism Again reduction in demand in the OECD countries affected the Indian gems and jewellery industry, handloom and tourism sectors. Around 50,000 artisans employed in jewellery industry have lost their jobs as a result of the global economic meltdown. Further, the crisis had affected the Rs. 3000 crores handloom industry and volume of handloom exports dropped by 4.6 per cent in 2007-08, creating widespread unemployment in this sector (Chandran, 2008). With the global economy still experiencing the meltdown, Indian tourism sector is badly affected as the number of tourist flowing from Europe and USA has decreased sharply.

5. Exchange rate depreciation With the outflow of FIIs, Indias rupee depreciated approximately by 20 per cent against US dollar and stood at Rs. 49 per dollar at some point, creating panic among the importers.

6. IT-BPO sector The overall Indian IT-BPO revenue aggregate is expected to grow by over 33 per cent and reach $64 billion by the end of current fiscal year (FY200). Over the same period, direct employment to reach nearly 2 million, an increase of about 375000 professionals over the previous year. IT sectors derives about 75 per cent of their revenues from US and IT-ITES (Information Technology Enabled Services) contributes about 5.5 per cent towards Indias total export. So the meltdown in the US

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will definitely impact IT sector. Further, if Fortune 500 hundred companies slash their IT budgets, Indian firms could adversely be affected.

7. FII and FDI The contagious financial meltdown eroded a large chunk of money from the Indian stock market, which will definitely impact the Indian corporate sector. However, the money eroded will hardly influence the performance real sector in India. Due to global recession, FIIs made withdrawal of $5.5 billion, whereas the inflow of foreign direct investment (FDI) doubled from $7.5biilion in 2007-08 to $19.3 billion in 2008 (April-September). Conclusion From the above argument it can be noted down that the Financial or Subprime Crisis was the shear consequences of greed and to make too much profit on the part of Wall Street Firms and Investment Banks. This crisis also shows the failure of capitalist market economy. Though the Indian economy would be able to withstand the crisis without any major difficulty, but the crisis is still causing mayhem all over the world.

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Reform and Resistance

Will any of these changes occur in an effective way? In recent months these institutions have warmed to changes in these areas. For example, in April 2008, it was decided that rich countries at the IMF would give in 3 percent of the votes; 2 percent went to emerging countries and 1 percent to other developing countries. However, this is still not that much and this crisis shows that more is needed in a more deeper and meaningful way. This will be hard to predict. If history is any indicator, power and greed politics always ruin good ideas. Those who benefit from a system are less likely to be receptive to change, or want to steer change in a direction that will be good for them, but that may not mean good for everyone. And tensions, even amongst the more powerful nations are already showing. For example, the US has not invited Spain to a financial crisis summit for mid-November. As the worlds eight largest economy and home to 2 of the worlds top 16 banks, a meeting of the G20 (G7 plus some developing nations) sees Spain (the worlds 8th largest economy) missing out of either classification. Spain, however, sees this as US retaliation for the country withdrawing its troops from Iraq. It has full EU support for being present at this meeting as well as support from a number of Latin American countries. Like France, it wants to see in-depth reform of the global financial system and focuses on IMF reform as well as giving more representation to emerging nations. The eventual outcome of the G20 meeting seemed mixed. They agreed to use government spending to fight a spreading recession, to tighten lax oversight of markets, to resist protectionism, and to revive stalled negotiations for a new global trade pact. They also agreed to meet at the end of March 2009 to follow up. Developing countries also got more assurances about increased say at international financial institutions through promises of reform at the IMF and World Bank. But others argued that the meeting outcome seemed more vague than concrete and only these principles seemed to have been agreed without anything more concrete. The call to resist protectionism has been a prime concern from the Bush Administration, sometimes (incorrectly) equating calls for regulation with protectionsim. The calls for regulation have typically been to make companies more transparent and ensure the financial
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mess created can be avoided in the future. Nonetheless, other regions around the world agree that generally free trade is desirable over protectionist policies. History has shown that once economies mature they benefit from less protectionist measures (but also shows that nations on early stages of development may also benefit from it). The APEC trading bloc, for example, represents almost half of all world trade. Most member states are generally industrialized, so as a group, APEC nations have agreed to resist protectionist measures. Paul Krugman suggests that protectionism may be necessary for a while as these are not normal conditions where the case for protectionism may be on weaker grounds, at least for industrialized nations. Reform of the IMF and World Bank, however, will be crucial for much of the world. Whether that actually happens and to what extent those with power are willing to truly share power is something that we will find out in the course of the next year. The promise of rearchitecting the global financial system more fundamentally seemed to wither away slightly. As the Bretton Woods Project noted, the G20 had little time to effect much and could not do it alone, any way: G20 governments, swept off their feet by the financial crisis, were never going to be able to reach a consensus on deeper reforms within the few weeks taken to prepare the summit. Critics argue that the G20 can never tackle this agenda alone. As Miguel DEscoto, president of the UN General Assembly said: Only full participation within a truly representative framework will restore the confidence of citizens in our governments and financial institutions. He continued, Solutions must involve all countries in a democratic process. International economic architecture: cleaning up the mess?, Bretton Woods Project, November 27, 2008 Hardly mentioned in the mainstream media by comparison, the more democratic alternative was the Doha conference on financing for development meeting at the end of November in Doha, Qatar, held by the United Nations General Assembly. Perhaps partly because of lack of mainstream media attention, the Doha conference also resulted in weak pledges and disappointment.
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More generally, as Vandaele also finds, The most powerful international institutions tend to have the worst democratic credentials: the power distribution among countries is more unequal, and the transparency, and hence democratic control, is worse. John Vandaele, Democracy Comes to World Institutions, Slowly, Inter Press Service, October 27, 2008 Although history often shows that those with agendas of power tend to win out, history also shows us that power shifts. A financial crisis of this proportion may signify the beginnings of such a shift. And so, it is perhaps only at a time of crisis that more fundamental rethinking of the entire economic system can be entertained.

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Rethinking economics?
During periods of boom, people do not want to hear of criticisms of the forms of economics they benefit from, especially when it brings immense wealth and power, regardless of whether it is good for everyone or not. It may be that during periods of crisis such as now, the time comes to rethink economics in some way. Even mainstream media, usually quite supportive of the dominant neoliberal economic ideology entertains thoughts that economic policies and ideas need rethinking. Harvard professor of economics, Stephen Marglin, for example, notes how throughout recent decades, the political spectrum and thinking on economics has narrowed, limiting the ideas and policy options available. Some have been writing for many years that while the current economic ideology is flawed, it only needs minor tweaking to correct it and make it work for everyone; a more compassionate capitalism, but capitalism nonetheless. Others argue that capitalism is so flawed it needs complete doing away with. Others may yet argue that the bailouts by large government will distort the markets even more (encouraging bad practices by the big institutions) and rather than more regulation, an even freer form of capitalism is needed. What seems clear is that at least for a while, debate will increase in the mainstream. This will also attract ideologues of different shades, leading to both wider discussion but also more entrenched views. Those with power and money are less likely to agree to a radical change in economics where their power and influence are going to diminish, and will be able to lobby governments, produce compelling ads and do whatever it takes to maintain options that ensure they benefit. It is perhaps ironic to quote, at length, a warning from Adam Smith, given he is held up as the leading figure of the economic ideology they promote: Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their good both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.
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Merchants and master manufacturers are the two classes of people who commonly employ the largest capitals, and who by their wealth draw to themselves the greatest share of the public consideration. As during their whole lives they are engaged in plans and projects, they have frequently more acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly exercised rather about the interest of their own particular branch of business, than about that of the society, their judgment, even when given with the greatest candour (which it has not been upon every occasion) is much more to be depended upon with regard to the former of those two objects than with regard to the latter. Their superiority over the country gentleman is not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. Adam Smith, The Wealth of Nations, Book I, (Everymans Library, Sixth Printing, 1991), pp. 87-88, 231-232 (Emphasis added. Additional paragraph breaks added for readability)

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