The G-7 finance ministers meeting in Washington on Friday must act decisively to solve the global crisis. With the Dow Jones Industrial Average plunging another 680 points on Thursday, there’s no excuse for this gathering to end up as a talking shop. Comprehensive, global action is required.
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The model to follow is banking bailout put forward by the UK. Adopt something similar globally and the worst of the banking crisis could be brought to an end. The Dow’s dramatic fall is just a symptom of the crisis. The real problem is in the credit markets, which remain gummed up. The UK’s bank bailout offers the best solution so far for un-gumming them.
The scheme has a better chance of success. It ensures banks are properly capitalized, guarantees medium-term lending and provides short-term liquidity.
There are already signs that other countries are thinking of following suit. Critically, the US seems on the point of redirecting at least some of the $700 billion (Rs34.1 trillion) it was planning to spend on buying toxic assets into directly recapitalizing banks.
But we are not even remotely there yet. Even if the US properly recapitalizes its banks—and that’s a big “if”—two key weaknesses in the global financial system will remain.
First, some banks elsewhere (especially in continental Europe) will still need shoring up. Second, and even more important, the medium-term lending problem hasn’t been solved in the US and many other countries. Solving this won’t be cheap, given how many banks and investment banks have gorged themselves on short-term wholesale borrowing in recent years.
The UK has provided a template that could work: the government won’t actually provide the cash but it will guarantee medium-term borrowing by banks in return for an appropriate fee.
The G7 should crack these remaining issues. Ministers should realise that a coordinated, comprehensive, global solution will be much more effective than more piecemeal action. They should also realize they don’t have time to dawdle. Markets won’t stabilize until they act, and in the meantime, more financial giants could tumble.