A mission for finance chiefs

Jan.27, 2008

A mission for finance chiefs

THE annual World Economic Forum (WEF) conference has concluded in Davos with a serious warning from the International Monetary Fund (IMF) that "serious" response was required to counter the risk of a US recession and slowing global growth, including both monetary and fiscal measures.
The warning from IMF Director-General Dominique Strauss-Kahn has highlighted the gravity of the crisis the world faces in that it is the first time in more than 25 years that an IMF chief has called on countries increase their public spending, even countries with deficits, instead of fiscal consolidation.
He pulled no punches when he talked about the US economy. "Whatever the answer is on (the possibility) of a (US) recession, what is clear is there will be a serious slowdown and it needs a serious response," he said. "We cannot rely only on monetary policy."
Even the usually reserved Japanese prime minister, Yasuo Fukuda, warned that the world's economy faced growing downside risks. He emphasised that countries must co-ordinate policies to limit the effect of a global economic slowdown from the fallout in US subprime mortgages.
Indeed, this year's WEF meeting was in dark stark contrast to past gatherings held against a backdrop of bumper corporate profits, strong growth and inflation within relative control in most countries.
Senior US officials are talking about the "resilience" of the US economy, but the facts on the ground and figures in US and international books do not offer much room for optimism.
The international community could not overlook that the crisis facing the world economy came from the US housing sector which was hit by losses by banks which invested in complicated securities backed by high-risk US mortgages. That has led to a credit crunch in which bank lending has been restricted, and resulted in a negative impact on the global financial system and financial markets.
What has been noted but not reviewed in depth at Davos was that the losing streak in the US housing sector is likely to continue and the situation could get worse by the lack of transparency about the extent of the problems facing the US economy.
Throughout the Davos conference, there was a sense of urgency that something has to be done and done fast to check the meltdown, but few proposals with specific outline for action were heard, perhaps because no one wanted to call a spade and spade.
The intiative is now shifted to the Group of Seven countries — which control a big chunk of the world economy. The group's finance chiefs are meeting in Japan next month and this could be an opportunity for them to weed out realities from politics and come up with concrete and implementable ideas to check the downslide and rectify the course.
Of course, it is not an easy task, given the complexity of factors, whether in the US or any other major economy, but it is a task and mission facing those who take pride in themselves as being people who could determine the future of the global economy.