Credit crisis driving global cooperation

World markets responded positively Monday to new initiatives emerging from meetings in Washington and Paris.

Matt Dunham/AP
Good timing: The British government injected $63 billion into the nation’s leading banks Monday. Stock markets in Asia, Europe, and the United States rebounded. Above, London’s business district.

As governments of the industrialized world struggle with the global credit crisis, they may be relearning an old lesson: there is more strength in standing together than in struggling alone.

The international nature of capital flows and stock markets has forced unprecedented cooperation between nations on interest rate cuts, support for banks, and other measures meant to restore investor confidence. Philosophical and political differences that seemed insurmountable only weeks ago have melted away as leaders search for pragmatic means to prevent their economies from melting down.

It's true that financial systems are among the most integrated parts of the modern world. Not every nation is happy about serving in this ad hoc alliance to save capitalism.

But if nothing else, leaders are learning that they can pull together constructive initiatives in the face of danger. And if they can save banks, why not the environment? If they can stop the spread of shareholder panic, why can't they stop the spread of nuclear weapons?

"We may find if we deal with the global credit crisis, we will start to think we can deal with the problem of global warming, or energy, or rogue states," says Colin Camerer, an economic behaviorist at California Institute of Technology in Pasadena.

"This might help invest world institutions with greater responsibility."

Even as the United States and the rest of the world try to recover from the present crisis, they should start looking ahead, said World Bank president Robert Zoellick in an Oct. 13 speech.

The world needs a modernized multilateralism for a new global economy, argued Mr. Zoellick in his address at the annual meeting of the World Bank's board of governors.

The world's model now should be the conference held in Bretton Woods, N.H., that set up the outlines of the post-World War II financial system, said Zoellick. The leaders that took part in Bretton Woods left both a legacy of specific international monetary institutions and "an intellectual, policy, and political commitment to act multilaterally to turn the problems of an era into opportunities," said Zoellick.

Investors Monday appeared to find comfort in weekend actions and pledges from government officials. Britain's FTSE 11 jumped 8 percent, while Germany's DAX went up 11 percent. Hong Kong's Hang Seng index surged 10.2 percent on Monday.

The US Dow Jones Index snapped back at the opening of trading, quickly gaining more than 500 points. But some investors said they still expected volatility ahead following last week's devastating Dow loss of 2,400 points (18 percent).

These gains came in the wake of a pledge by the Bank of England that it would use up to $63 billion to help the three largest British banks strengthen their balance sheets. European nations also pledged to work together to inject capital into teetering banks, and to guarantee inter-bank lending.

US Secretary of the Treasury Henry Paulson reportedly was studying the feasibility of guaranteeing bank-to-bank loans in the US.

Market experts welcomed the British move and the European coordination, saying that these actions addressed the three fundamental problems facing banks: capitalization, liquidity, and funding.

"There are three things here: it's this injection of capital into the banks; it's standing behind the interbank market; and, three, it's dawned on central banks that they'll have to lower interest rates," says Mike Lenhoff, chief strategist for the London brokerage firm Brewin Dolphin. "All these things are needed in order for confidence to return."

Justin Urquhart Stewart, director of Seven Investment Management in London, says the crucial aspect was the concerted way that international partners finally responded to the crisis. He says that the EU agreement was in stark contrast to a meeting 10 days ago at which they "behaved like cats in a sack, scratching and bickering at each other about who hadthe better quality of guarantee, which was stupid and irrelevant."

The financial crisis "needed this international coordination," he adds. "But we will needstill broader international coordination to bring in China, India, and Russia because the key to recapitalization isn't national government – it's going to be sovereign wealth funds and getting trade moving again."

By working together, European nations will limit the impact of the money market mess on the real economy, adds Philippe Waechter, director of economic research at Natixis Asset Management in Paris.

"This cooperation is an important answer to negative fear and worry in individual states," says Mr. Waechter.

Almost overnight, the global financial crisis has swept away years of national economic philosophy. The bailout-rescue plans in the US and Britain, for instance, represent a dramatic shift away from decades of laissez-faire economics towards more regulated markets.

In Europe, the crisis has become a genuine test for the idea of European unity. In the United States, it has sharply affected the tone and tenor of the presidential race – something that polls show may be leading to a surge in support for Democratic candidate Barack Obama.

Either Senator Obama or rival Sen. John McCain will take office at a time of unprecedented global economic challenges – challenges that will require both leadership on the part of the US chief executive and extensive cooperation with international institutions, according to a new report by the Brookings Institution.

Restoring financial stability may be the next president's top such problem. Others include: setting a green agenda that can win support both from the US public and developing nations, which are large per capita emitters of greenhouse gases; reimagining global trade, to widen the world's circle of economic winners; navigating around China's economic rise; deciphering Russia's attitude to world economics; engaging an emerging India; revitalizing ties to Latin America; and supporting Africa's growth turnaround.

"Given America's enormous stakes in a strong and resilient global economy, it will be critical for America to lead on the main challenges we face today," writes Lael Brainard, Brookings director of global economy and development.

Meanwhile, Germany moved down a path similar to the one Britain has taken.

On Monday, Chancellor Angela Merkel's Cabinet approved a banking rescue package worth up to 500 billion euros ($679.3 billion), seeking to restore confidence and order to Germany's battered financial sector.

The package comprised up to 400 billion euros in bank guarantees and as much as 100 billion euros in state funds – sums that together almost equal Germany's annual tax take.

"Today we have established a first building block for new financial market conditions," Mrs. Merkel told reporters. "We have one goal – (the plan) should help to create new confidence, between banks, in the economy and among citizens."

Earlier the euro rose against the dollar on news the cabinet had approved the plan, which Merkel said should come into effect on Friday after parliament has passed it.

Germany initially pledged help for banks on a case-by-case basis, but changed course and decided to adopt a sector-wide plan after the financial crisis grew worse last week.

• Material from the Associated Press in Berlin was used in this report.

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