Global Economy Withers as Bush Administration Dithers

According to the New York Times, the Bush Administration has lost valuable time in coming to grips with the American financial crisis for ideological reasons. The rot started when the US Treasury decided not to use taxpayer money to save Lehman Brothers. Then, the Treasury persuaded Congress to approve $700 billion to buy distressed securities tied to mortgages instead of acting swiftly by pumping money into banks in return for part ownership. That policy failed to settle the American and global financial markets.

European markets lost more than 10 percent on Friday morning. In late trading London’s FTSE 100 index was down about 5 percent. In Paris, the CAC-40 lost about 6 percent, and Frankfurt’s DAX was down 6.4 percent.

Japan’s Nikkei 225 stock average, which had already declined 10 percent Wednesday plunged 9.6 percent on Friday, closing at 8,276.43.

In a day of major panic selling, the Dow Jones index fell as much as 5% in the US before ending down 1.5%. Some analysts are suggesting that this may be a good time to buy US stocks, provided the Bush administration gets its act together in its twilight days and tackles the financial crisis.

Belatedly, the administration has decided to pump money directly into the banks. The only problem is that owing to the inordinate delay, the bill to restore financial equilibrium may have gone up substantially. The 700 billion approved by Congress may not suffice.

President George Bush has recognized that this is “a serious global crisis, and therefore requires a serious global response, for the good of our people.” He said this after his Saturday morning meeting at the White House with finance ministers of the Group of 7 industrialized countries, who were in Washington to attend the annual meetings of the IMF and the World Bank.

Mr. Bush said the G-7 countries had agreed to general principles including the need to prevent the collapse of important financial institutions and protect the deposits of savers.

Where does the world stand at present? In a nutshell, as summed up by the BBC, the world’s financial markets are afraid that we are facing a recession. Apart from the negative indicators referred to above, the following may be noted:

· On Friday, the British pound declined to $1.6902, the lowest in five years, but recovered later.

· Tokyo's shares plunged 24% during the week, double their weekly fall during the 1987 market crash

· Oil prices fell to $77.99 for US light crude as compared to $147.7 in July.

· The three-month bank rate known as Libor rose to 4.8%

· Moscow and Jakarta stock markets remain suspended

· The Vienna stock market fell 10% on re-opening after trading was suspended on Friday morning

Of all the countries in the world, China is probably the most insulated from the current financial crisis. True, car sales, house prices and the stock market have all gone down. Sales of domestic air tickets are also down. But these items are affordable to a relatively small percentage of the population. With a vast under-tapped market of 1.3 billion people, the scope for increasing domestic consumption is limited only by the low incomes earned by the wage earners. If the government were to increase wages, it is likely that domestic demand would increase to take up a lot of the slack created by the decline of demand from overseas markets. By raising the standards of living of the Chinese people through its fiscal policy, the Chinese government would not only the enhancing the welfare of the people, but also compensating for the losses that could otherwise accrue to the national economy owing to the financial crisis caused by the failures on Wall Street.