The dramatic downturn gripping the global economy has breathed new life into old questions about how best to run our economic systems.Politicians, business leaders and policymakers searched for solutions at this year's World Economic Forum in Davos.
Meanwhile, different debates were taking place at the "alternative" World Social Forum in Belem, Brazil.
There, an eclectic mix of some 100,000 campaigners, thinkers, and working people came to starkly different conclusions about the causes of the downturn, and how best to address it.
We asked four participants from around the globe to give us their opinions. Click on the links below to read their arguments.
New World Order
In recent weeks, the world has been politely standing by and watching how things play out with the fiscal stimulus and latest bank-bailout plans in Washington. Yes, there's been some grumbling overseas about "buy American" provisions in the stimulus bill, but for the most part, officials elsewhere don't want to step on the toes of a new President to whom they are favorably disposed. They also don't want to endanger legislation that they hope will help jump-start the global economy.
Just wait a couple of months, though. Politicians from Beijing to Berlin to BrasÃlia see the current crisis as the product of a messed-up global financial infrastructure dominated by the U.S., and they will soon be pushing for big changes--whether Americans like them or not.
All this will begin to gel on April 2, when the newish international organization known as the G-20--the leaders of 19 of the world's biggest national economies, plus the European Union--meets in London. An unofficial meeting has already taken place, at the World Economic Forum in Davos, Switzerland, where G-20 officials (with the conspicuous exception of those from the U.S.) made speeches, conversed in the halls and gave a sense of the direction in which the world outside the U.S. wants to head. (Read TIME's special report on Davos 2009.)
The global discussion of the financial crisis is strikingly different from the one in the U.S. Here there's still something of a debate over whether the mess is the result of too much government interference in the housing market or too little government regulation of financial markets. In the rest of the world, that's no debate: inadequate and inconsistent financial regulation is uniformly blamed. What's more, a consensus seems to have emerged among the world's finance ministers and central-bank bosses that the chief underlying cause of the crisis was an unbalanced and out-of-control system of global capital flows in which some big-spender countries (namely the U.S.) ran up huge debts while big savers (China and India, for example) hoarded surpluses.
On the regulatory front, the path to a new global approach is pretty clear. Last spring the leaders of the G-7, a club of wealthy nations, agreed to create a "college of supervisors" to more closely coordinate regulation of multinational banks. The Group of Thirty, an influential organization of current and former central bankers and financial regulators, recommended in January that "systematically significant" financial institutions (those that are too big to fail) be identified in advance and subjected to higher capital requirements and tougher regulation. (See who's to blame for the financial crisis.)
Yet regulators around the world were already jointly setting bank-capital standards before the current crisis hit. A lot of good that did us. So there is also much talk about the need for a new architecture--"a new Bretton Woods" was a phrase that echoed around Davos--to rein in global financial flows.
All this will begin to gel on April 2, when the newish international organization known as the G-20--the leaders of 19 of the world's biggest national economies, plus the European Union--meets in London. An unofficial meeting has already taken place, at the World Economic Forum in Davos, Switzerland, where G-20 officials (with the conspicuous exception of those from the U.S.) made speeches, conversed in the halls and gave a sense of the direction in which the world outside the U.S. wants to head. (Read TIME's special report on Davos 2009.)
The global discussion of the financial crisis is strikingly different from the one in the U.S. Here there's still something of a debate over whether the mess is the result of too much government interference in the housing market or too little government regulation of financial markets. In the rest of the world, that's no debate: inadequate and inconsistent financial regulation is uniformly blamed. What's more, a consensus seems to have emerged among the world's finance ministers and central-bank bosses that the chief underlying cause of the crisis was an unbalanced and out-of-control system of global capital flows in which some big-spender countries (namely the U.S.) ran up huge debts while big savers (China and India, for example) hoarded surpluses.
On the regulatory front, the path to a new global approach is pretty clear. Last spring the leaders of the G-7, a club of wealthy nations, agreed to create a "college of supervisors" to more closely coordinate regulation of multinational banks. The Group of Thirty, an influential organization of current and former central bankers and financial regulators, recommended in January that "systematically significant" financial institutions (those that are too big to fail) be identified in advance and subjected to higher capital requirements and tougher regulation. (See who's to blame for the financial crisis.)
Yet regulators around the world were already jointly setting bank-capital standards before the current crisis hit. A lot of good that did us. So there is also much talk about the need for a new architecture--"a new Bretton Woods" was a phrase that echoed around Davos--to rein in global financial flows.
Bretton Woods is the mountain resort in New Hampshire where in 1944 the Allied nations met--with the U.S. calling almost all the shots--to plan a postwar financial system. The Bretton Woods creations included the International Monetary Fund (IMF), the World Bank and a quarter-century of fixed exchange rates built around a U.S. dollar that was linked to gold. The fixed exchange rates and gold standard unraveled in the 1970s, and ever since we've had a system in which the IMF occasionally steps in to help countries in currency crises (usually imposing harsh terms in the process) but exercises no real control over the global financial system.
After the emerging-market currency collapses of the late 1990s, in which IMF aid wasn't much help, the lesson that emerging economies such as China and India took was that they needed to build up gigantic reserves of U.S. dollars to protect their currencies. To build those reserves, they ran big trade surpluses, which were in turn enabled mainly by record trade deficits in the U.S., which were in turn enabled by massive borrowing from around the world. It was an extremely unbalanced financial ballet, and it has now come crashing to the ground.
latest........On deck: foreign trade, federal budget, retail sales, business inventories, consumer sentiment, and some timely talk from key Fed officials
Last week’s smaller-than-expected 3.8% drop in real gross domestic product in the fourth quarter was hardly good news for economic growth in the first half of 2009. The reason is the split between very weak demand and an unexpected rise in business inventories. The upswing in inventories contributed 1.3 percentage points to economic growth, while economists had anticipated a subtraction.
The problem is that overall spending last quarter dropped at a 5.1% annual rate, led by declines of 3.5% in consumer spending and 19.1% in capital spending by businesses. That’s 80% of U.S. demand right there. That sudden dropoff in demand, in addition to a huge 19.8% plunge in exports, caught businesses by surprise. Companies had been trimming their inventories for four consecutive quarters, but last quarter they couldn't cut fast enough to prevent an unwanted buildup, and ratio of inventories to sales has spiked sharply higher across all business sectors. That portends a steep liquidation in the first quarter, which will likely extend into the second quarter.
The resulting cutbacks in output and employment will weigh heavily on GDP growth, especially in the first quarter. Economists are now shifting their views of the pattern of GDP declines this year, and most now expect the first quarter contraction to be even sharper than last quarter.
This week’s data will help to determine just how weak current-quarter growth will be. The Bureau of Economic Analysis, which assembles the GDP numbers, did not have December data on business inventories and foreign trade when it issued its initial estimate of fourth-quarter GDP. The week offers reports on both, which could result in a significant revision to last quarter’s top-line number. Plus, the impact of those two reports on the mix of fourth-quarter GDP could have implications for growth this quarter. In addition, the government will issue data on January retail sales, which will offer guidance on how much drag consumers are exerting on overall demand this quarter.
Also of key market interest this week, two top Federal Reserve officials will be speaking on Tuesday. Bill Dudley, in his first public appearance since taking over as President of the New York Fed from current Treasury Secretary Tim Geithner, will speak on Treasury Inflation Protected Securities (TIPS) at a conference in New York. His remarks will most likely include the subject of inflation. In addition, Fed Chairman Ben Bernanke will be testifying before Congress on the Federal Reserve’s program to stem the financial crisis.
The resulting cutbacks in output and employment will weigh heavily on GDP growth, especially in the first quarter. Economists are now shifting their views of the pattern of GDP declines this year, and most now expect the first quarter contraction to be even sharper than last quarter.
This week’s data will help to determine just how weak current-quarter growth will be. The Bureau of Economic Analysis, which assembles the GDP numbers, did not have December data on business inventories and foreign trade when it issued its initial estimate of fourth-quarter GDP. The week offers reports on both, which could result in a significant revision to last quarter’s top-line number. Plus, the impact of those two reports on the mix of fourth-quarter GDP could have implications for growth this quarter. In addition, the government will issue data on January retail sales, which will offer guidance on how much drag consumers are exerting on overall demand this quarter.
Also of key market interest this week, two top Federal Reserve officials will be speaking on Tuesday. Bill Dudley, in his first public appearance since taking over as President of the New York Fed from current Treasury Secretary Tim Geithner, will speak on Treasury Inflation Protected Securities (TIPS) at a conference in New York. His remarks will most likely include the subject of inflation. In addition, Fed Chairman Ben Bernanke will be testifying before Congress on the Federal Reserve’s program to stem the financial crisis.
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