Geithner to G-20: Stay the course
'Substantial' fiscal and monetary moves across the globe will get traction, US Treasury secretary says.
New York and London
Global economic trends are the bleakest they have been in 50 years. Trade is falling, international banking giants need to be bailed out, and joblessness is rising around the world.Skip to next paragraph
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But in the face of this juggernaut of bad tidings, top US officials are counseling world leaders not to panic – to just stick with what they are doing.
“There is a very substantial amount of fiscal and monetary action in place” across the globe, said US Treasury Secretary Timothy Geithner on Wednesday. “That will start to get traction.”
US won't be conservative
In past downturns, Mr. Geithner argued in a speech in New York at the Council on Foreign Relations, governments have been too conservative and reacted too slowly. “They put the brakes on too soon,” he said. “We won’t do that.”
A first goal for Geithner and Federal Reserve Chairman Ben Bernanke is to try to stabilize the world financial system. On Thursday, Geithner is set to lay out the Obama administration’s framework for dealing with the type of systemic risk posed by nonbanking companies such as AIG, the failed insurance company into which the US government has poured $170 billion. The Obama plan will broaden oversight to include institutions such as insurance companies or hedge funds whose demise could cause a negative cascade effect in the broader economy.
The problem is not just a US problem. Geithner noted that if nations do not act together on oversight, companies will merely move offshore to avoid regulation. Thus, he sees in the current economic crisis a window of opportunity “to begin the process of getting a consensus” on how to fix the overall system.
About $5 trillion in loans are either delinquent or will be at some point, estimates economist Mark Zandi of Moody’s Economy.com. Half of those are in the US and half are in the rest of the world. “Not all of those loans will default and be a loss,” he says, estimating actual losses may total $2.4 trillion to $2.5 trillion.
Trade down 9 percent
The bad loans come against a backdrop of dismal global economic projections: The World Trade Organization (WTO) said this week that world trade will shrink by 9 percent, the largest percentage decline since World War II.
“The contraction in developed countries will be particularly severe, with exports falling by 10 percent this year,” the WTO said in its annual report, issued Monday. “In developing countries, which are far more dependent on trade for growth, exports will shrink by some 2 percent to 3 percent in 2009.”
As global trade dwindles, global protectionism is on the rise, despite nations’ pledges not to raise trade barriers. Even some members of Congress tried to insert “Buy in the USA” provisions into the economic stimulus package that was signed into law on Feb. 17.
“Examples of it are everywhere, but so far it’s been contained,” says Mr. Zandi.
First postwar global downturn
For the first time in 50 years, the International Monetary Fund is predicting that the world economy will shrink. The IMF’s revised forecasts will say the global economy will contract by 0.5 to 1 percent in 2009, IMF managing director Dominique Strauss-Kahn said Monday. The decline will be sharpest in developed countries, including the US and Europe, which will shrink by 3 percent.