We now expect the global economy to come to a virtual halt,” International Monetary Fund (IMF) chief economist Olivier Blanchard told reporters on Wednesday, after the multilateral lender said in a new forecast that global growth is at its lowest point since the end of World War II.
The question now is: what is to be done?
There are two sets of responses: One, to prevent a deeper financial crisis and the other, to keep the real economy of output and jobs on track. The two problems are linked: A further fall in growth will do more damage to bank balance sheets which will worsen the credit crisis, leading to a sharper fall in economic activity. So governments and central banks will have to move fast to put the financial sector back on its feet, even as they increase public spending and money supply to support demand.
That’s not rocket science. But there is little clarity on how all this is to be done. We have already seen policy responses change—from temporary liquidity pumped into the global financial markets to direct purchases of commercial securities by the US Federal Reserve, expensive plans to buy troubled assets and semi-nationalization of banks and financial institutions. But the financial crisis has continued unabated.
Then there have been announcements of lavish fiscal stimulus programmes collectively running into several trillion dollars. These are attractive short-term prescriptions with long-term ramifications. They are most likely going to push up government deficits and public debt—a mess that will have to be sorted out by future generations when the debt has to be repaid. Meanwhile, the recession has deepened.
These observations are not meant as criticisms. The world economy is in genuine trouble and most of the old solutions have proven to be ineffective. That is all the more reason why nations should cooperate and find a way out of the quicksand. Trying to climb out on one’s own through trade barriers and currency devaluations is not going to help at all. That was the mistake made in the 1930s. It is a mistake that should not be repeated. But then those who forget history are condemned to repeat it.
How should the global financial crisis be tackled? Tell us at email@example.com