by Salil Sarkar
Article published on the 2008-10-28 Latest update 2008-11-01 15:23 TU
British PM Gordon Brown and French President Nicolas Sarkozy meet in Versailles in October
In practical terms, the real challenge for financiers and policymakers now is how to build a new sense of trust in finance.
In the medium term, regulators are preparing reforms that aim to make the system look credible, even in a world where the benefits of risk dispersion are no longer taken as a creed. These would force banks to hold more capital and ensure that manufacturing securities turns more transparent.
The US government has come up with 700 billion dollars and more in what amounts to a partial nationalisation of several financial institutions.
European Union states in the eurozone are unveiling programmes to boost investor confidence and easing credit lines.
But financial markets are still having vapours. Governments proposing bailouts do not always have the money to keep their promises. There are worries, too, that another giant bank, perhaps a European one, might fail.
The International Monetary Fund estimates that total losses and write-downs from the credit crisis will amount to 945 billion dollars (757 billion euros) and the Bank of England has put them as high as 2.6 trillion dollars (2.25 trillion euros).
According to the Bloomberg financial wire, total losses so far are $633 billion (507 billion euros), with 383 billion dollars (307 billion euros) in the Americas, mainly the United States, 225 billion dollars (180 billion euros) in Europe; and around 25 billion dollars (20 billion euros) in Asia.
Pessimists predict that the European losses will grow, possibly approaching the same level as those in the Americas. But European Union countries do not see eye-to-eye on a unified approach. Each country has adopted separate measures, Ireland taking the lead.
Despite its initial reluctance, the US is to host a world summit, barely two weeks after the presidential elections.
It will bring together the so-called G20 group of countries. Members include some of the countries most affected by the crisis in the developed world, as well as states such as Argentina, Brazil, China, India, Indonesia, South Korea, Mexico, Russia, Saudi Arabia, South Africa and Turkey.
For poorer and developing countries, the effects may be less dire. China can reorient its industrial produce to domestic consumers, whose purchasing power the government in Beijing is seeking to boost.
Over the years, China’s low-cost exports have kept consumption and growth running in the developed countries, again chiefly the United States.
Low prices of Chinese products kept inflation down in western countries. China’s trillion dollar reserves comprising dollars, euros, yens but also large piles of US treasury bonds, meant the US was living on credit coming from China and some of its other Asian neighbours.
Some western experts hope that China will help the US fend off crisis.
British Prime Minister Gordon Brown, who met French President Nicolas Sarkozy to discuss the crisis in late October, is calling on China and oil-producing countries to pump hundreds of billions into the IMF to fight global financial "contagion".
"I donʼt think the Chinese will move in to save the American system when they need to look into how theyʼre going to use their resources for their domestic needs," says Phee Yok Ling, an economist at the left-wing Third World Network in Beijing."When the crisis started unfolding in the United States, a lot of people expected Chinese sovereign wealth funds to step in," Phee points out. "But lots of people are asking why the countryʼs money should be put in stakes abroad, especially since some of the fundamental problems that need fixing in the US relate to the impact of the deregulation of the US financial system these past ten years."
In the western countries, with leaders scrambling to prevent recession turning into depression, inflation looks set to come down. The financial system is broken, but can be repaired, they say. Both stagnation and inflation can be countered, goes the line. This may be at the cost of changing alignments and balances of power worldwide.
This year, according to the latest World Economic Outlook from the International Monetary Fund, growth is forecast to be 2.7 per cent. Next year it is expected to be a mere 1.9 per cent.
The economies of high-income countries are forecast to stagnate next year. Meanwhile, emerging economies are forecast to grow at 6.1 per cent, better than the rich ones but slower than in past years.