Seventy-nine years ago the crash of Black Monday and Black Tuesday on October 28–29, 1929, cut stock prices by 23 percent. Economists now generally consider the misguided monetary and fiscal policies that followed (tightening on both counts) the cause of the Great Depression, not the stock market crash (which eventually cut stock prices 89 percent from their peak). Hopefully, we are not embarking at present on a controlled experiment to see whether they have been right. There could be a significant market recovery by end-2009 if mainstream earnings projections are achieved and price-earnings ratios return to more normal levels.
Suddenly people are worrying about deflation risks to the US economy. While the Fed was quite right to set aside inflation concerns when it lowered its benchmark interest rate this week, recent data on the outlook and the global slowdown does not indicate that we are at risk of deflation. It is unrealistic to think that we are.
First, asset price declines—even large and widespread ones as in US housing markets—almost never result in broader price declines. As I demonstrated in a paper [pdf], the bursting of only 2 out of 44 stock or real estate bubbles led to instances of consumer price index (CPI) deflation (and 16 out of 18 prior episodes of deflation in advanced economies were not preceded or accompanied by asset price busts).
On October 14, 2008, I wrote a piece “Making the World Safe for Sovereign Wealth Funds” on the release of the “Santiago Principles” (Generally Accepted Principles and Practices [GAPP]) by International Working Group (IWG) of Sovereign Wealth Funds (SWFs) on October 11.
At the end of my piece, I expressed concern that the members of the OECD—the organization of the world’s leading democracies and market economies and, as such, the group representing the views of the recipients of many SWF investments—had not adopted sufficient reciprocal measures to support the openness of international investment. OECD officials subsequently sent me information about OECD guidance on SWF investments. Most of that information was previously available. However, the actions with respect to accountability for decisions and the decision-making process were agreed only on October 8 and had not been highlighted. The OECD communication is reproduced below, followed by my additional observations.
The International Monetary Fund (IMF) has suddenly reopened a traditional line of business: large-scale lending programs (Iceland, Ukraine, Hungary, Pakistan, and counting). As global recession spreads across the world and increases in virulence, the Fund likely will be lending again for years. Simultaneously, talk has shifted from the world economy not needing the IMF as an international lending institution any more to the IMF not having enough resources to lend and make a difference. The first view was wrong, and the second view is wrong.
One may regard it as a mistake to convene a conference that is widely described as Bretton Woods II without the two years plus of preparation that preceded Bretton Woods I in 1944. But the die has now been cast, and the leaders of the G-20 countries are going to convene shortly in the first stage of what is widely described as Bretton Woods II. That being so, it behooves those of us interested in the topic to suggest the agenda that they should pursue.
It’s official: the big boys (and big girls) are coming to town. The White House has announced that the heads of state of the G-20 countries will meet in Washington on November 15 for a financial summit. In some circles this is being billed as "Bretton Woods II"—a historic opportunity to rewrite the rules of the international financial architecture, spurred by the most serious global financial crisis since the Great Depression. Others see it less charitably, as look-busy grandstanding, with bad timing, inadequate preparation, and pie-in-the-sky ambitions.
The financial crisis has now caught up with emerging markets—with a vengeance. Wherever you look, in Eastern Europe and the Baltics, Latin America or Asia, the financial carnage is evident. Even China, the most immune to contagion, is going to see its growth decline from 12 percent to 9 percent. Elsewhere, panic in global financial markets has compelled the International Monetary Fund (IMF), which previously was trying to adapt to a no-crisis world, back in the lending and financial rescue business. While the IMF engages in talks with Hungary, Iceland, Ukraine, Pakistan, and other countries, the United States and its European partners have begun discussions about stepping in with credit lifelines to middle income developing countries in desperate need of dollar loans to avoid default.
It is pretty common these days, at least in Washington, to pour scorn – or at least cold water – on the idea that a global summit could have much impact on the crisis. I would count myself among the skeptics with regard to a mega-meeting with 100+ countries around the table, and it does seem like at least one of those meetings is scheduled for December or thereabouts.
In recent weeks, several governments stricken with financial emergencies have tried to circumvent the International Monetary Fund (IMF) by turning to Russia, China, Saudi Arabia, and other reserve-rich states for crisis finance. These moves underscore the need for common acceptance of a set of principles to guide bilateral and regional responses to countries requiring liquidity and balance-of-payments support during the present crisis. Such principles should be discussed and adopted at the high-level meetings scheduled over the coming weeks as part of the international response to the financial crisis.
Kiev has an eerie feeling. The many construction projects have come to a sudden halt. A couple of weeks ago, cranes were turning all over the skyline of Ukraine’s capital, but now they stand abandoned, as credit has dried up.
The International Monetary Fund (IMF) is close to giving Ukraine a fast and large credit to salvage its economy. It is badly needed. The banking crisis in the West might have been mitigated with enormous financial injections. Now the emerging markets call for their salvation.