STWR - Share The World's Resources

The US mortgage crisis has spiralled into "the largest financial shock since the Great Depression" and there is a one-in-four chance that it will cause a full-blown global recession, the International Monetary Fund warned yesterday. 

10th April 08 - Heather Stewart, The Guardian (UK)

As finance ministers and central bankers arrived in Washington to discuss ways of tackling the crisis, the IMF warned, in its twice-yearly World Economic Outlook, that governments might be forced to step in with more public bailouts of troubled banks and cash-strapped homeowners before the crisis was over.

"The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system," it said.

After warning this week that the world's financial firms could end up shouldering $1trn (£500bn) of losses from the credit crunch, the IMF said it expected the US to experience a "mild recession", notching up GDP growth of 0.5% in 2008 and 0.6% in 2009. It expects house prices to fall by up to a further 10% before the downturn is over.

With the US sliding into such a recession, there is mounting pessimism about the ability of the rest of the world to escape unscathed. The IMF shaved its forecast for growth in the global economy by half a percentage point, to 3.7% for this year, and by 0.6% - to 3.8% - for 2009.

Although the Washington-based body expects most emerging economies to continue to grow strongly over the next two years, it admits that efforts to tackle the knock-on effects of the credit crunch could be hampered by fast-growing commodity prices. "Inflation has picked up around the globe, mainly reflecting sharp increases in food and energy prices," it said.

In the US, President Bush has already signed off a $150bn tax rebate package to kick-start the US economy, and the Federal Reserve last month backed an extraordinary emergency buyout of the investment bank Bear Stearns.

However, the IMF said more taxpayers' cash may still need to be spent to unblock the markets. "Given the serious risks coming from sustained financial market dislocations, the recent legislation to provide additional fiscal support for an economy under stress is fully justified, and room may need to be found for some additional support for housing and financial markets."

Simon Johnson, IMF research director, presenting the report in Washington, described such bailouts as an essential "third line of defence", after interest rate and tax cuts, for governments struggling to prevent a deep recession.

He said the main risk to the global economy over the next year was the emergence of a vicious circle, as house prices continued to fall, dealing a fresh blow to the world's banks, and creating a damaging feedback loop.

"Sentiment in financial markets has improved in recent weeks since the Federal Reserve's strong actions with regard to investment banks. But we have seen how strains in markets can quickly become reinforcing, and the possibility of a negative spiral or 'financial decelerator' remains a possibility," he warned.

The IMF's downbeat analysis creates a gloomy backdrop for policymakers arriving in Washington to discuss ways of easing the credit squeeze. Such is the concern about problems in the financial markets that a range of radical options is on the table. These include greater disclosure of losses on sub-prime assets by banks; firmer regulation of credit-rating agencies, and - more controversially - plans for taking some of the risky mortgage-backed assets at the heart of the crisis on to government balance sheets. Alistair Darling, the chancellor, is calling for a detailed plan to be agreed over the weekend.

The IMF backed more comprehensive disclosure by banks. "We fully support the move towards greater disclosure," Johnson said. "We think that marking to market [rating assets on current market values, not book values] and continuing to recognise losses is an important part of how the financial system operates."

The US Federal Reserve has cut US interest rates by a hefty 3 percentage points to 2.25% since the crisis began, in an attempt to restore confidence and turn the credit taps back on. The IMF welcomed the Fed's approach but said it would not be enough to prevent recession.

"Adverse financial conditions are likely to have a continuing negative impact on activity in the United States, notwithstanding the Federal Reserve's strong response," it said. "The United States remains plagued by profound errors in risk management."

The value of the dollar has plunged to record lows in the past year as the outlook for the US economy has darkened, but the IMF said the greenback still "remains somewhat on the strong side".

No bounce after the hard landing

Alistair Darling's forecast that Britain will bounce back from the credit crunch by next year now looks hopelessly optimistic, according to an authoritative assessment by the International Monetary Fund.

Just a month ago, in the budget, the Treasury had pencilled in 2% GDP growth this year and 2.5% in 2009 as the economy recovers, but yesterday the Washington-based IMF predicted far weaker growth of 1.6% both years.

The chancellor has said repeatedly that Britain is "better placed" to weather the storm because of its low unemployment and flexible labour market, but the IMF calculates that the housing market is overvalued by up to 30% and faces a damaging correction.

"The housing market is going to be a drag on the economy," said Charles Collyns, a senior IMF economist. "We do see house prices softening already, and we see potential that the housing correction will continue, with an impact on consumption. We also see the UK being affected by the tightening of the financial constraints related to the turmoil in the financial markets."

He added that the knock-on effects of weak growth in the US and the eurozone would also depress growth.

Link to the IMF World Outlook Report 2008

Link to original source

This free-market farce proves the state is crucial

10th April 08 - Ulrich Beck, The Guardian (UK)

The massive global risk of an unfettered financial system is now being felt, thanks to its dogmatists' blinkered irresponsibility

The Play. Act one: Chernobyl. Act two: the threat of climate change. Act three: 9/11. Now the curtain is rising on Act four: Global Financial Crises. For a backdrop, see yesterday's headlines: IMF slashes world growth forecast; Credit crisis could cost $1 trillion. Dramatis personae are the Hardcore Neoliberals, who in the face of the danger have overnight converted from the market faith to the state faith. Now they're praying, begging, pleading for the mercy of the state interventions and multi-billion pound handouts of tax payers' money - the sort of thing they condemned for as long as the profits were pouring in. What a priceless convert's comedy is being performed on the world stage. If only it weren't tinged with the bitter taste of reality.

Here's John Lipsky, a senior official and economist of the International Monetary Fund and longstanding market fundamentalist, who in a dramatic appeal is suddenly urging the governments of the fund's member states to sign up to the antithesis of everything he has previously preached: prevent a world economic crash with massive rescue spending. When even John Lipsky is urging politicians to "think the unthinkable", the gravity of the crisis is plain.

The spectre of the "unthinkable", which is now being raised everywhere, is of course supposed to awaken memories of the world economic crises of the last century - and save the banks from disaster. Next Joseph Ackermann of Deutsche Bank appears and admits that he, too, no longer believes in the self-healing powers of the markets. Before you know it, there he is retracting his retraction and insisting that he has no doubts about the stability of the financial system. That sounds reassuring. Or does it? If the respected banker were being frank then he would have to concede two things. First, that the history of the present crisis is a history of market failure, and second, that perplexity, or indeed sheer ignorance, dominates on all sides.

The market has failed, because the incalculable risks of mortgages and other loans were deliberately concealed in the expectation that the distribution and concealment of the risks would minimise them. Now, however, it is -evident that this minimisation strategy has turned into its opposite: a maximisation and dissemination strategy of incalculable risks. Suddenly the risk virus is everywhere, at least in anticipation. It's clear that things can't go on without the state's guiding hand. At the same time, it is unclear whether things will be any better with the injection of billions of pounds, euros or dollars of taxpayers' money.

Of course, economic risks and crises are as old as the markets themselves. And as the Great Crash of 1929 testifies, financial collapse can bring down political systems - for example the Weimar Republic in Germany. It is all the more surprising then, that since the 1970s the financial institutions of the Bretton-Woods system, established after the second world war, which were intended as global-political responses to global economic risks, have been systematically dismantled and replaced by a succession of ad hoc solutions. Thus we face a kind of paradox: while markets have never been more liberalised and global, the global institutions that monitor their activities have been forced to accept drastic reductions in power. This new, unlimited nature of markets means we cannot exclude the possibility of a world financial crisis on the scale of 1929.

Unlike environmental and technological risks, whose physical consequences initially become socially relevant "from outside", financial risks also directly affect a social structure. Hence financial risks can be more easily "individualised" and "nationalised", giving rise to major differences in perceptions of risks. In other words, even when there are catastrophic breakdowns, it is individuals, usually the weakest, who suffer, in their millions. Accordingly global financial risks - not least when it comes to the perception of causes - are attributed as national risks to individual countries or regions.

As the "Asian crisis", the "Russian crisis", the "Argentinean crisis" - and now the first signs of the "American crisis" - demonstrate, it is the middle classes who are worst hit. Waves of bankruptcies and job losses shake the respective regions. Yet almost invariably, western investors and commentators view the crises exclusively from the perspective of the threat posed to financial markets. Global financial risks, like global ecological crises, cannot be confined to the economic subsystem. They mutate into social upheavals triggering political threats and breakdowns. In the case of the Asian crisis, such a chain reaction destabilised states and simultaneously led to outbreaks of violence against minorities, who were cast as scapegoats.

What would have seemed inconceivable only a few years ago is now emerging as a real possibility; even advocates of a global free market now detect that, after the collapse of communism, only one opponent of the free market remains, namely the unbridled free market itself. The market has shrugged off any responsibility for democracy and society in the exclusive pursuit of short-term profit maximisation.

There are surprising parallels between the Chernobyl reactor disaster, the Asian financial crisis and the threat of the collapse of the international financial system today. The traditional methods of management and control are proving unreliable and ineffective in the face of global risks. The millions of unemployed and poor cannot be financially compensated; it makes no sense to insure against the consequences of global recession. At the same time the social and political explosive force of global market risks is becoming palpable. Governments are overthrown, civil wars become a threat. As the public begins to recognise the risks, the question of responsibility is increasingly raised. This dynamic leads to a reversal of neoliberal policy - not the economisation of politics, but the politicisation of the economy. Not even the most liberal national economy functions without macroeconomic coordinates. It's with a certain degree of bewilderment that one asks oneself: how could anyone in his right mind assume that the world economy is any different?

Link to original source  

Global poverty to halve by 2015, Africa lags - report

9th April 08 - Reuters 

The world is on course to halve extreme poverty by 2015, but Africa will fall far short of the U.N.'s Millennium Development Goals, the World Bank and International Monetary Fund said on Tuesday.

A new report by the global institutions also warned that urgent action was needed to tackle climate change, which threatens to exact a hefty toll on particularly poor countries and reverse progress in fighting poverty.

The 2008 Global Monitoring Report, released ahead of the IMF and World Bank meetings in Washington this weekend, said strong economic growth in much of the developing world had contributed to the decline in global poverty.

It said the number of extreme poor -- those living under $1 a day -- declined by 278 million between 1990 and 2004, and by 150 million in the last five years of that period.

Globally about 1 billion people still live in extreme poverty, the report added.

The largest reduction in poverty rates was in regions with the strongest growth, in particular in East Asia, including emerging powerhouses China and India, the report said.

Still, in Africa progress to cut poverty rates has been uneven, it said, with 18 countries showing strong economic growth of about 5.5 percent over the past decade. Twenty others in Africa, however, many hit by conflict, were trapped in low growth, averaging around 2 percent annually.

The report also said that while some progress had been made in meeting eight globally agreed development goals by 2015, prospects were gravest for reducing child and maternal mortality, with serious shortfalls also likely in primary school education, nutrition and sanitation.

Robert Zoellick, the World Bank president, said he was personally worried about shortfalls in fighting hunger and malnutrition, which he termed "the forgotten" millennium development goal.

He said high global food and energy prices had focused increased attention on the issue, but more was needed, especially since higher prices were likely to last for several years.

Zoellick and IMF managing director, Dominique Strauss-Kahn, also pointed to dangers for growth in the developing world from recent financial market turbulence, which began with subprime mortgage market problems in the United States.

Turning to the environment, the report said poverty reduction may not be sustainable if forests are lost, fisheries depleted, water or air is polluted and soil degraded.

It said water scarcity and deforestation were already a factor in the developing world and are valuable assets and sources of income to poor countries.

"The depletion of natural resources and environmental degradation undermines the long-term growth prospects of many developing countries," the report said.

It called for coordinated global action to avert further climate change, adding that extreme climatic events such as droughts and floods in the world's poorest countries may also exacerbate conflicts and cross-country migration.

Link to original source  

Subscribe to this comment's feed

Write comment