Global
Recession, Global Solution
Srichand P. Hinduja,03.26.09, 12:00 PM EST
Rich and poor countries must work together to overcome the crisis.
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Nothing quite like the current economic crisis has happened
before, with financial systems the world over all failing in tandem. But it is
worth noting that the boom that preceded the present downturn was not an
overnight occurrence; it gathered pace over a decade of negative saving and underinvestment--particularly
in the U.S.--along with certain corrupt practices that were readily tolerated
in the midst of the "boom" period.
It was a sustained "boom" during which the rest of the
world financed the large deficits of the U.S. and accumulated huge amounts of
dollar reserves, leading to the fall in the value of the dollar. Along with the
weakening of the dollar, many of the world's currencies linked with the dollar
also weakened. Consequently, wholesale and retail price levels increased in
dollar terms.
During this period, the regulatory bodies, auditors and rating
companies--in fact, the whole system--failed. Chairmen and members of the board
of directors failed too; so have the management and compliance officers. Add to
that the failure of many "rank and file" employees.
As a consequence, the existing gap between rich and poor has grown
even wider. The poor, who constitute a majority of the world's population, have
suffered, and global conflicts have increased. Yet many among the rich have
become richer, and the middle class has also benefited considerably from the
boom.
Now the dollar is appreciating, the pound is depreciating and
there is excess supply in commodities and products. However, human nature,
which reacted to the gap and the imbalance in the system, is now taking
corrective action to bring about some balance, as it always does when events go
to extremes.
The U.S. and the developed world have taken action to bail out the
financial sector and some industrial companies. This is to ensure that
bankruptcies are avoided and people do not lose their jobs--or the deposits
they have with the financial institutions.
However, bailing them out by pouring billions of taxpayers' money
into the system is not the answer for an immediate revival of the global
economy.
At a purely pragmatic level, what guarantee is there that the money
will not be misused again, particularly when greed and fear continue to
determine human actions? What is there to ensure that some of the money does
not disappear again through corporate misjudgment or through undeserved
incentives and bonuses?
Only a few months back, the monitoring and supervisory
institutions allowed billions of dollars of loans to be made on the strength of
inflated books that showed illusory balance sheets worth hundreds of billions.
We now know these balance sheets all too often failed to reflect the real state
of affairs.
Again, the person in the street is suffering and will suffer more
as unemployment rises. As for the people who have run the system, it is perhaps
too optimistic to assume that they will be able to mend their ways overnight.
What we are witnessing is the trailer to the real movie. The
recession could last anywhere between three and five years, possibly even
longer. The worst pain is, I fear, yet to come. What governments are offering
by bailing out financial institutions and industrial manufacturers is temporary
oxygen in an attempt to stave off the worst effects of the deepening recession.
As nature seeks to correct the imbalance, we have to recognize that both
socialism and capitalism have failed. Giving large sums of money to the very
people who caused the problems in the first place seems very unwise, to put it
mildly.
We know that this type of capitalism has failed. And yet, if we go
back to nationalizing the financial institutions, how will we decide which
other institutions deserve to be bailed out? Will we also have to bail out the
automotive industry? Where does it all end?
Yes, banking institutions and certain industries should be rescued
so they do not go into bankruptcy and employees do not lose their jobs. But
while rescuing them, it has to be ensured that the right teams are in place, so
they will not commit the same failures as their predecessors. The first and
most important step is to secure depositors up to a much higher level than at
present.
The second step is to make laws and rules for vetting the
membership of boards and the top management of banks.
In a third step, support should be given to the banks that
legitimately require funds at reasonable costs for maintaining and expanding
their credit activity to satisfy the borrowing requirements of their
creditworthy clients. Funds should be deployed to guarantee re-employment and new
job creation. The spending in the U.S. from the large fiscal stimulus should focus
on investing in people and technology to create long-lasting, incentive-driven
jobs that will increase America's competitive capacity for decades.
Revision of the statutes of the International Monetary Fund
and the World Bank should also be given top priority, to ensure that
these institutions can dedicate greater resources to meeting the requirements
of developing nations that in turn will fuel U.S. technology exports as they
advance their own economics.
The idea of creating an institution to reconstruct toxic or bad
assets certainly deserves consideration to ensure that the banks will focus on
clean assets. But this should not become an excuse for repeating past mistakes,
and help should be combined with enhanced regulatory supervision. Nonetheless,
industrialized countries should take the lead by assuring that they will not
resort to protectionist measures. The G-8 leaders should make commitments to
this effect and urge others to cooperate.
In the short term, an effective measure would be a tax rebate for
the year 2008 of up to 30% to 40% to those taxpayers who have income of up to
$100,000 a year, provided such rebates are spent within a specified time
limit--a maximum of three to six months. This would stimulate spending and
revive the economy much faster. This may also be a much cheaper solution.
I believe that, in the medium term, the most effective way of
confronting the economic instability throughout the world is by directing our
attention to the needs of the developing and less-developed nations. A sensible
way to approach this is by investing in their physical and social
infrastructure, separately from any current aid program. Contracts placed for
this purpose in the developed world would not only help preserve jobs there but
would also create new jobs and enlarge the consumer market in the developing
world.
In addition to mega-infrastructure projects, which have a long
incubation period, for immediate results financial resources can be directed to
smaller projects such as feeder roads instead of major highways, modest and
alternative energy projects, development of water resources, and expansion of
educational and health facilities. In this manner, jobs can be created more
quickly.
With President Obama in office--a man who is already a symbol of
change--we trust he will implement measures that will correct the failures of
the financial system, instead of finding short-term solutions that only
postpone the real problem. Britain's Prime Minister Gordon Brown and other G-20
leaders have also demonstrated their leadership in this crisis and presented
concrete proposals to reform the financial system.
It is hoped that these suggestions will help the G-20 leaders meet
their objectives to reduce global poverty by creating jobs and increasing
productivity. This will expand consumer demand and encourage further investment.
Thus the real value of money will be preserved, and economic stability regained.
Of course, just as taking these steps will lead us to a better
place, failing to do so will also have its consequences. Conflict will persist,
the divide between rich and poor will grow, the impressive economic gains of
the last 10 years will go unrestored and nationalism will reassert itself at
the expense of globalism. Accordingly, I am hopeful that all participants in
the G-20 summit will consider these proposals.
To sum up:
--Our approach ensures that the funds for bailing out financial
institutions are used first and foremost for securing depositors' holdings in a
world of counter-party uncertainty that incentivizes money to leave the system.
--It ensures that a new and more rigorous regulatory system and
new policies for reviving the economy are introduced. At the same time,
governments are cautioned not to resort to protectionism.
--A tax rebate for the year 2008 would revive the consumer economy
with immediate effect.
--In addition to mega-projects, smaller and environmentally
friendly infrastructure projects in emerging economies would produce immediate
results and enable the developed world to enjoy the benefits of expanding
economies to create a new consumer market share among the billions on low
incomes and the unemployed throughout the world.
--The main message is that the developed and developing worlds
have to work together in the present crisis. Only in this way can the
increasing wealth gap between rich and poor nations, with its fateful
consequences of conflict and terrorism, be avoided.
--Finally, such an approach would reduce present political
conflicts, create better understanding between nations and bring about global
political and economic stability.
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