Cause and Effect
By Ian Munroe • Aug 3rd, 2009How well has Barack Obama dealt with the crisis so far?
I’m giving him a ‘B.’ The fiscal policy has been fast. It looks like it’s going to be reasonably effective, but it’s not big enough. And the bank policy has been cautious - I think the word might be ‘
diffident.’ They’ve shied away from taking any really strong measures to clean up the system.
So I support the general direction of the policies, but I’m disappointed in the lack of boldness.
And how well has the international community responded?
Some things have been good. The expansion of IMF funding is a good sign. In general, I think the IMF has done a good job compared with during the Asian crisis, for example. There have been some major disappointments, though. The inability of the European Union countries to settle on any cooperative economic policy, and in particular the failure to aid emerging Europe on a sufficient scale in this crisis has been a real disappointment.
There’s not a lot of international cooperation going on aside from the IMF funding, and that’s a shame because this really is a global crisis and there’s a lot to be said for cooperating in the response.
What should the Gulf states do to cope with the financial crisis?
They don’t have a lot of freedom of action. They need to engage in some austerity. They need to ride this through. Although oil prices have fallen a lot from those very high peaks in early 2008, they’re actually holding up surprisingly well in real terms.
The price of oil is substantially higher than it was early in this decade, despite the fact that the world economy is so deeply depressed right now. … This is not 1986; this is still a world of surprisingly robust demand for oil.
Credit rating agencies have taken a credibility hit. How do we make them better at what they do, especially when it comes to assessing financial institutions in the future?
Who knows, is the short answer. This is very difficult. We have a problem that doesn’t seem to have an easy solution. The rating agencies are paid essentially by the people they rate. And while crude corruption may be reduced, may be avoided, there’s clearly a built-in tendency not to recognize the realities. Try and think of an alternative model and it’s not so easily done. Have them taxpayer financed? How do we avoid politicization? Try to get some other model for their payment? It’s not clear exactly how you do this. It does require some thought, and it is a real problem because, like it or not, the rating agencies have an enormous impact. Institutional investors almost have to base their decisions on those ratings. But I don’t know what the answer is.
Beyond that, the major changes are going to be a return to a world of more balance, you might say. It’s unlikely that we can have a full world recovery while these very large surpluses for some reason persist [in some countries], and there are large deficits in others. So we’re probably going to be in a world in which China is one way or another pushed more to rely on domestic demand, and in which the United States is pushed to rely more on its domestic saving capacity. It’s a little bit hard to figure out how the Gulf region fits into this, because it will have a high income - I think oil prices will at least partially recover - but limited absorptive capacity [to increase further].
