Calls for Change Mount at IMF, World Bank Meet.
Abid Aslam, IPS, October 12, 2008, from Washington.

Gone are the mobs in the street. Faced with a global recession, those demanding change from the rulers of the global economy appear to be on the inside as the International Monetary Fund (IMF) and World Bank hold annual talks.

Take Robert Zoellick, the bank’s president. In his view, the Group of Seven (G7) finance ministers of industrial countries, long the embodiment of the world economic order, “is not working”. “We need a better group for a different time,” Zoellick said this week. He called for a new “steering group” made up of Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, and G7 members Britain, Canada, France, Germany, Italy, Japan and the United States.

Such a group would incorporate more than 70 percent of the world’s economic output, 56 percent of world population, and 62 percent of its energy production. It also would bring together major emitters of carbon, aid donors, regional powers, and the primary players in global capital and commodity markets.

The new entity would not replace the current group of seven with a body twice its size, Zoellick insisted. Rather, membership would be fluid and open to up-and-coming powers, “especially if their rising influence is matched by a willingness to help shoulder responsibilities” and to find the trick of financial and economic cooperation.

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His counterpart at the IMF, Managing Director Dominique Strauss-Kahn, has taken advantage of this weekend’s talks — including a G7 session that began Friday — to challenge finance ministers to rise above parochial interests and act “quickly, forcefully, and cooperatively” to avert, or at least contain, a global recession.

“There’s no domestic solution to crises like this one,” Strauss-Kahn said in comments after some European governments took isolated action. “All kinds of cooperation has to be commended. All lonely acts have to be avoided if not condemned.”

As a practical matter, no significant redrawing of the international financial architecture is likely to emerge when the bank-fund talks close on Oct. 13. Even so, the comments from these two financial and development gatekeepers reflect growing concern at a lack of effective global leadership amid the worst financial crisis since the stock market crash of 1929 ushered in the Great Depression.

A televised address by outgoing President George W. Bush seemed to stoke that concern Friday.

“We know what the problems are. We have the tools to fix them. And we’re working swiftly to do so,” Bush told U.S. investors — only to see markets tumble, extending a losing streak that has vaporised trillions of dollars in retirement savings.

This, after finance ministers and central bankers from the G7 countries announced joint interest-rate cuts, individual measures to boost markets’ cash on hand, a 700-billion-dollar U.S. bailout, and plans by some governments to take equity stakes in banks failed to restore investor confidence.

While it remained to be seen what further steps G7 governments and those of other major global players would take to head off further catastrophe, Strauss-Kahn said he had asked the IMF’s board to reactivate an emergency financing scheme last used following the Asian financial crisis of 1997. This would enable cash-strapped countries to get IMF loans in as little as two weeks, and with fewer strings than the fund would normally attach.

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Marita Hutjes, a spokesperson for international charity Oxfam said, questioned the emergency programme’s suitability for poorer countries and pressed the IMF to make good on promises to increase countries’ participation in its own decision-making.

“Recent reforms of the Fund’s shock facility for developing countries were underwhelming. They can’t borrow as much as they’ll need, and most of that money will be subject to high numbers of conditions,” said Hutjes.

“An IMF that can really help crisis-hit poor countries fight their global financial warming would need to have those countries sitting at the decision-making table. That is still not the case. Mr. Strauss-Kahn himself said all countries need to be included in the solution. The Fund should swallow its own medicine,” she added.

Japanese officials suggested that near-bankrupt Iceland should receive the first emergency loan. As of Friday, the mid-Atlantic nation’s government had refused to ask the fund for help.

Whether any developing countries — already hit by runaway food and fuel prices and now squeezed by slowing Western demand for their exports and shunned by panicked investors — would turn to the IMF remains to be seen. On Friday, however, the Group of 24 (G24) poor nations demanded again that the global watchdog deliver “stronger surveillance of advanced economies, policies, and financial systems.”

Leaders might be able to avert Armageddon if they act in unison, Strauss-Kahn said, but no one at his agency appears to be betting on economic recovery any time soon.

“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” the IMF said in its latest World Economic Outlook report, released Wednesday. In it, the fund abandoned upgraded forecasts made just a few months earlier.

In its bleakest assessment so far, the IMF cut its 2009 forecast of world economic growth from 3.9 percent to 3 percent. This would be the most anaemic performance since 2002 and hover around the threshold of what the IMF would deem a global recession.

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Andreas Whittam Smith: We could be on the brink of a Great Depression – It has been fashionable to say that this can never happen again.

Monday, 13 October 2008, The Independent of London.

As we return to work this Monday morning, let the words of the director general of the International Monetary Fund, Dominique Strauss-Kahn, ring in our ears. Mr Strauss-Kahn, having spent all Saturday with finance ministers in Washington, warned that the global financial system has been pushed “to the brink of a systemic meltdown”. And he added that the measures taken thus far to deal with the financial crisis “have not yet achieved the goal of stabilising markets and bolstering confidence”.

I stretch “systemic” to mean that we are all affected by what has begun to happen – the shrinking of bank credit. Banks won’t even lend to each other, let alone to the rest of us. In a sense, they know too much. Grimly aware of the substantial amounts of dud loans on their own books, following a prolonged period of over-optimistic lending, they assume the worst of each other. They also turn down highly respectable companies, the mainstays of the economy, when they come to them for credit. For as the banks’ mistakes return to haunt them, they feel compelled to hoard cash.

Two weeks ago, for instance, I was on the executive floor of a large company, a household name for generations. Decent people run it. It makes substantial profits. I found the directors stunned to discover that they could no longer go on raising short-term loans from time to time to balance out the ebbs and flows of their cash flows. This was a “first” in the company’s long history. From now onwards, the directors would have to run their business more cautiously. They will provide less employment and reduce the orders they place with outside suppliers.

Systemic, because virtually all businesses have some borrowing. Credit is the oxygen in the system. Take it away and businesses begin to falter. They become like climbers at high altitudes. An example is the plight of local authorities and charities whose funds have been trapped in insolvent Icelandic banks. Some of these lenders will have difficulty in paying their bills and so they will unwittingly harm others who know nothing of Icelandic banks.

Systemic, seeing that the United States, Germany, Japan and most large economies are feeling the effects. Last week, for instance, shares in General Motors crashed to their lowest level since 1950. Yes, since just before the company launched the first ever “American” sports car, the Chevrolet Corvette, with its white paintwork and red upholstery. Over 50 years later, General Motors’ customers are having increasing difficulty in obtaining car finance. And the stock market was spooked by the fact that loans raised by General Motors itself, already classified as “junk” debt, are to be down-rated even further – to sub-junk, I suppose. In these circumstances, virtually nobody will lend to this giant.

“Meltdown,” in Mr Strauss-Kahn’s phrase, is not an exaggeration because depriving the economic system of credit would quickly result in prolonged recession, or depression, call it what you will. Stock markets suddenly began to sense this possibility last week. That is why investors rushed for the exit.

Indeed, it is not fanciful to make comparisons with the Great Depression, which started with the stock market crash of 29 October 1929 and ended some time in the late 1930s. President Roosevelt’s chairman of the Federal Reserve, Marriner Eccles, tried to sum up its essence in his memoirs published in 1951. He had led the Federal Reserve from 1934 to 1948 and seen everything. I quote him extensively because of his sudden relevance: “This is what happened to us in the Twenties,” Mr Eccles wrote, “We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system (which) increased about 50 per cent. This debt, at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer instalment debt, brokers’ loans, and foreign debt.”

Before going further, notice the similarities between then and now – the presence of mortgage debt and of shadow banking – what Mr Eccles called debt outside the banking system. Mr Eccles went on: “The stimulation to spend by debt creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time … The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality under consumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment … (finally) the vicious circle of deflation was closed (with) one-third of the entire working population unemployed. This then, was my reading of what brought on the depression.”

It has long been fashionable to say that this can never happen again because this time we know better than to let banks actually crash – that is, apart from Lehman Brothers a few weeks ago, whose collapse had had such serious consequences. Nor would governments savagely hack into public spending as they did in the early 1930s – though there are plenty of reasons in 2008 to cut back. Nor would we lapse into protectionism again – in spite of increasing temptation to move in that direction. We know what not to do. But do we know what to do?

“On the brink,” observed Mr Strauss-Kahn, a clear reference to the failure of the Group of Seven industrialised nations to decide anything definite at their meeting on Saturday. But since then, I am glad to say, the pace has quickened. There are three encouraging developments. This morning, we are likely to learn which British banks are to get money under the UK Government’s £50bn bank rescue. These may well be HBOS and Royal Bank of Scotland.

The Bush administration has quickly embarked on an overhaul of its own strategy for rescuing the foundering financial system. Having two weeks ago persuaded Congress to let it spend $700bn to buy distressed securities tied to mortgages, the White House has decided in addition to follow Britain’s approach. The US government would inject capital directly into the nation’s banks. Finally, the French government also appears to be moving towards the British solution, expressing a willingness to guarantee banks’ short-term borrowings as well as their deposits.

As an international civil servant rather than a finance minister with daily politics to consider, Mr Strauss-Kahn may have felt that he should issue the dreadful warnings that others dare not proclaim. Governments won’t even use the word “recession” when it is staring them in the face. And while the weekend’s developments have by no means achieved “the goal of stabilising markets and bolstering confidence”, they do represent progress of a kind.