EDITORIAL: by Peter WestmoreNews Weekly
Is the financial crisis receding?
, August 22, 2009
It is now two years since the sub-prime mortgage crisis in the United States triggered the US financial crisis, and a year since the global investment house, Lehman Brothers, collapsed after the retiring US President, George W. Bush, announced that his Administration would not rescue it from bankruptcy.
Within hours, the New York and London stock exchanges were in free fall; apparently impregnable merchant banks faced bankruptcy; and the freezing up of inter-bank lending led to a collapse in world trade.
Within weeks, President Bush, Britain's Prime Minister Gordon Brown, and leaders of other major industrialised nations announced massive bailouts of their nations' financial institutions, and an unprecedented injection of liquidity into the financial system. President Obama has continued Bush's policy, to the extent of rescuing many of America's merchant banks through government guarantees and capital injections, and recapitalised two of the country's largest auto-makers, Chrysler and General Motors.
Even China, whose spectacular economic growth was a consequence of state-sponsored foreign investment in its manufacturing industries, announced a rescue package costing hundreds of billions of dollars.End of the slide?
After a year of bad economic news, there are now signs that the worst of the crisis is over.
The unemployment rate in the world's largest economy, the United States, now nearly 10 per cent, went down by 0.1 percent in July for the first time in 15 months.
Additionally, company profits have been unexpectedly good, sales of cars and houses are also showing signs of recovery, and industrial output is expected to grow there in the third quarter.
In other countries, including Australia, a similar picture is emerging.
"We expect June to have been the last month of the US recession and April to have been the last month in the German recession, making it the deepest and longest in the post-war era for both countries," Barclays Capital's top researcher Christian Broda said. "In short, we have grown in confidence that the rebound that started in Asia early in the year has now become a truly global rebound."
Despite the pervasive optimism, there are other signs that the worst is still ahead.
Many of the positive signs in economic growth overseas are the direct result of government stimulus packages which will not be repeated, because last year's spending programs have already driven governments heavily into deficit.
For example, in the US, the improved car sales are a result of incentives offered by the US government, while the small reduction in America's unemployment rate was the result of 500,000 people giving up the search for work. The actual number of people unemployed in the US continued to grow, while full-time jobs are being replaced by part-time work.
But for other countries, the cloud has no silver lining. In Ireland, for example, for many years one of the success stories of the European Union, the government has implemented savage cuts to public expenditure and increased taxes to rein in the mounting national deficit, caused by the collapse in exports to both Great Britain and the United States.
Among other measures, social security has been cut, as has the public service, schools are being closed and teachers dismissed. The government has had to set up an agency to absorb €80 billion ($160 billion) in toxic assets from the Irish banks which would otherwise collapse.
A columnist for Britain's Daily Telegraph
, Ambrose Evans-Pritchard, wrote recently, "No doubt Ireland has been the victim of a savagely tight monetary policy - given its specific needs. But the deeper truth is that Britain, Spain, France, Germany, Italy, the US and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly" (Daily Telegraph
, July 18, 2009).
The British banking system is also under extreme pressure, with the Bank of England warning that the country's GDP, which declined 5.6 per cent in the last financial year, is likely to continue doing so this year.
The extent of the crisis in the developed world is evident from recent data from the International Monetary Fund (IMF).
The G20 countries will face a combined budget deficit of 10.2 per cent of GDP in 2009 - the biggest since World War II. Of these, the biggest will be faced by the US, with 13.5 per cent of GDP. Britain will have an 11.6 per cent deficit and Japan 10.3.
Government capital-raising will put strains on global lending, and undoubtedly push up interest rates, stifling economic activity and prolonging the global recession.
In the meantime, the underlying causes of the economic crisis - trade imbalances which left billions of dollar floating through the global financial system, and the failures of financial regulation, particularly on Wall Street - have yet to be addressed. Until they are, the danger is that the present crisis will be repeated.Peter Westmore is national president of the National Civic Council.