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Global crisis reason to rethink market economies

By Vision Reporter

Added 16th November 2008 03:00 AM

SINCE the 1930s, the US banks were the flagships of American economic might, and emulation by other nations of the fiercely free market financial system in the United States was encouraged. The recent financial crisis in the US and currently propagating through the entire global financial systems ha

SINCE the 1930s, the US banks were the flagships of American economic might, and emulation by other nations of the fiercely free market financial system in the United States was encouraged. The recent financial crisis in the US and currently propagating through the entire global financial systems ha

By Andrew Ojede

SINCE the 1930s, the US banks were the flagships of American economic might, and emulation by other nations of the fiercely free market financial system in the United States was encouraged. The recent financial crisis in the US and currently propagating through the entire global financial systems has its roots in the previous global financial crises that occurred in the 990s and early 2000s.

Capital movements were directed toward the US market with low interest rates, but with little or no regulation.
Many American consumers, even those without sound credit history, became overleveraged. There was explosion in sub-prime mortgage lending – lending at an adjustable interest rate to American consumers without sound credit and amidst uncertain future income. The financial turmoil threatens to put the banks, at the heart of the US financial system, partly in the hands of the government.

What is being done

The Bush administration is providing short-term liquidity to troubled banks by buying part of their stocks to shore up and restore confidence as part of the $700b government bailout. This bold step is viewed differently in the market.

To some, it is seen as a pure re-capitalisation of the US banking industry to restore confidence. To market purists, it is absolute nationalisation of the financial system.
On the other hand, the Bush administration may feel it has no choice. Credit, the lifeblood of capitalism, ceased to flow.

An economy based on the free market cannot function that way. It is reasserting itself in the lives of American citizens in ways that were unthinkable in the era of market-knows-best thinking.
The hands-off brand of capitalism in the US is now being blamed for the easy credit that sickened the housing market and allowed a freewheeling Wall Street to create a pool of toxic investments. Many critics now view the heavy intervention in the market as further robbing Washington of the moral authority to spread the gospel of laissez-faire capitalism.

European leaders have jumped at the opportunity provided by the financial meltdown to brag about the merits of Europe’s more interventionist traditions.
There has been some quiet triumph in Europe, combined with some real fear that the US turmoil will freeze growth, push unemployment back up and make it tougher for nations and households to make ends meet.

The economic slowdowns in the US and Europe were dragging on Asia’s biggest economies of Japan, China and South Korea.

The worry is, it could get worse. The fears highlight the growing realisation that Asian economies have not decoupled as much from their long time dependence on the US market as some had previously thought or hoped.

As the chicken come home to roost in the American economy and the panicky leaders search for a way out of the predictable mess, it is an especially propitious time to renew the call for a meaningful, thorough, and determined return to something that is obviously very much needed government regulation and market oversight. I disagree with the Governor of Bank of Uganda that Uganda’s financial sector will not be affected in the short run by the crisis. As the crisis hovers, the world industrial giants will immediately cut back on the remittances from Ugandan diasporas.

Ugandan currency is sinking. The policy to buy the shillings off the market in a bid to prop up its value is not open-ended. Every central bank has limits to how much reserves they can use to mop out excess liquidity.
In 1994, the Mexican Central Bank kept buying the pesos out of the market to avoid its continued depreciation until it ran out of foreign reserves. It could happen in Uganda too. A good number of Uganda’s financial institutions particularly commercial banks are foreign owned with significant ties to the affected industrial countries. This could also constrain their ability to play their intermediation role in the short term.

We are part of the interdependent global finances and yet we are also a small open economy. Our monetary and fiscal policies may not be as resilient and robust in dealing with the impacts on our economy of the collapse of the world financial system.

This is one of the worst financial crises since the great depression. The US is a consumer based economy that relies heavily on confidence of the consumer.

Once that confidence gets wiped out like it is looking right now, it can trigger a long and painful business recessionary cycle. If the US sneezes, the rest of the world catches a cold.

The writer is a PhD Candidate; Macroeconomic Policy Modelling, Development Economics and Time Series Econometrics - USA

Global crisis reason to rethink market economies

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