Slump will usher in a new order, says former trade minister
August 16, 2009
By Peter Fabricius
The economies of the world will never be the same again after the current global economic recession, says Alberto Trejos, the former trade minister of Costa Rica. "We will all live in a very different world."
And yet the world will not be as different as some people would like to think, including many in South Africa.
"As tempting as it is for many people to think that this crisis confirms that markets don't work and that the market economy is wrong, that is not the right lesson to take from here," says Trejos.
"The lesson is that excessive liquidity in the financial markets and excessively accommodating macro-economic policy carry a huge price to pay. But I don't see any evidence in this crisis that we should cut rates loose or close economies or re-regulate goods markets or opt for excessively state-owned or state-controlled economies. The sins that were committed here - and there were sins committed - were committed in the banking and financial sectors and the monetary policy but not necessarily in those other tracks.
"Fix what's wrong. Don't fix what's right, it's going to make what's wrong worse."
Trejos says the recovery from the global crisis - if recovery is defined as positive quarterly growth in the US economy compared to the quarter before - could begin as early as the end of this year or the start of next year. That's because the fall in US inventories has been so dramatic.
"And if the US manages to do that then the fast-growing developing countries are going to do it right after.
"But it's going to take a bit longer for you and for the countries which have bigger issues to tackle.
"How long till US wealth levels, not income and output levels, are back to normal? That's going to be a few years.
"And finally how long until we are back to what we defined as normal before? I think the answer is never. I think when we finally come out of this crisis - and I'm more optimistic than most analysts - we're going to have a very different economy.
"One in which the American saving rate is not going to be negative; one in which the big driver (real estate phenomenon) in the US - and after a while it was permeating into Latin America, Ireland and Spain - is not coming back even when we recover.
"US house prices, which were at the root of the crisis, will eventually recover to their pre-crisis levels. But the US will not return to the point where Americans put all their savings into property.
"I don't think we are going to be again in a situation where banks could conceive of making liquid assets out of anything, packaging toxic assets and selling them to little old ladies," he says.
In the post-crisis economy the rules for issuing mortgages will be much tighter and very risky mortgages or "funny" investment instruments like credit default swaps will just not be available or only to those who can prove they understand the risk and can afford it.
Financial institutions that are "too big to fail" - as American International Group and a few banks proved to be in this crisis - "are going to be forced to separate their risks and liabilities in different pieces at least so that none of their pieces are too big to fail".
Trejos also thinks that the US rule that prevented a bank from being both a commercial bank and an investment bank will be reinstated and banks will be forced again to operate in more limited geographic territories.
And former US Federal Reserve Bank governor Alan Greenspan's big blunder of setting a lax monetary policy, which encouraged rather than checked the stock market and property bubbles, will not be repeated, he said.
"But a lot of things which people think will not go back to what we had before, probably will go back to what we had before."
That will include not only the broad framework of the free market but also raw material and energy prices, which will recover from their present low levels, even if not to the same "crazy" levels as before.
"After all, the two most populated countries in the world, are at a stage where manufacturing is growing extremely quickly and are very insufficient in raw materials. And liquidity will also recover from the present credit crunch but not to the point that people stop worrying about cash flows because credit is so easy and anything illiquid can be turned into liquid.
"I think it's a rather good thing that when we emerge out of this, some of those problems will have been corrected... at least the US saving rate has recovered as Americans understandably, correctly, feel rather poor."
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