Monday, 6 April 2009

GLOBAL MELTDOWN




In 1989 USSR disintegrated, it was a signal to world community that they would have to leave communism if they want to exist। Capitalism was the only way to survive. Being a communist country, even China modified its economic policies so that it could prevent itself from the consequences which USSR had to face. USA became the leader of this new economic change which was based on capitalism. No country could even imagine that leading nation and world’s biggest economic power (USA) is collecting explosive which would destroy its own economy.

Few months ago, suddenly some implications aroused when due to mortgage lending unprecedented results shocked Bankers in USA. It caused US economy to be crashed down badly. As a result, banks collapsed throughout the country. Later, there was a slump in stock exchanges and a series of despair resided peopleۥs heart. This phenomenon gradually entered global market. Top and emerging world economies suffered due to slump down in their stock markets.

Finance is based on belief which is removed by fear. There is fear amongst investors to invest the money, lenders to lend the money to banks which are collapsing, politicians to take out initiatives to bring the solutions. Then this fear spread out its wings toward east from Beijing to Brussels where mortgage and car loans become harder to get. It caused job opportunities to be lessened and brought production down.

According to latest economic outlook all the world economies would have to suffer. It predicted that US economy will grow just 0.1% next year which is the lowest growth rate since last eighteen years.IMF expects that world economic growth would come down from 5%(2007) to 3%(2009).So world economy is now entering a major down turn which would hamper present growth rate. India, China and other emerging economies would also follow slow markets in coming years.

No doubt this slow down certainly would have repercussions, as- policy makers would have to look back in to existing policies and plan out new ones to tackle financial crisis. In USA there may be a repercussion that if US dollar is depreciated; it would have asked people to leave the jobs as US financial market is highly and directly related to common man’s life. If it happens, it would be noticed as a historical period where dollar loses its significant place in the global market.

Last month a meeting was held in Washington where the finance ministers of top world economies gathered and attended the meeting. It was held to find out solutions to confront the situation aroused by economic slowdown. It was concluded that it would be helpful and logical step to bring out stimulus packages to confront the challenges. If this action is implemented seriously by all G20 world economies, it would certainly help in reducing the stress caused by recession. Leaders are required to raise the rescue packages up to $500 billion as to IMF could help the developing countries to bolster their economic situation. In this process, Japan has offered $200 dollar and other top economic countries are also coming forward to make such commendable contribution.

To confront the challenges, Zambia asks support from Nigeria to meet potential requirements. Zambia newly elected president Rupiah Bwezani Banda said that Nigeria and Zambia had been very close friend in the past and if it assists him further, it would be beneficial for both the countries to confront the challenges of financial crisis.

In US, housing crisis exists as a challenge for next president. The current administration has promised to offer $200 billion to help controlling the losses occurred at banks owned by Fannie Mae and Freddie Mac. It was a significant step taken by government to take over the company and the motive was to increase the standard of housing sector. Wisconsin Paul Ryan, the top ranking official of the House Budget Committee said that the amount invested to rescue Fannie Mae and Freddie Mac’s company would decrease the deficit which would add to the fiscal challenges confronted by nation. Further, Rudy Penner said that the deficit would be very high this year and next too.

The current situation brings out debate of past 1980s and 1990s. During these years the then government had to face obstacles when budget deficit occurred which created economical complications. It plunged government in confusion to take domestic initiatives like health care and tax cuts. In 1990, President George H.W. Bush took his commitment back not to raise taxes and instead he agreed with democratic leader s to decrease the deficit. In 1993, President Bill Clinton avoided his commitment to slash taxes and instead he increased taxes. So the next president has to be sincere about his commitment made to citizens.

The US government has taken decision to capitalize its mortgages organization and it may help China to save its market which is going down due to economic downturn. China’s central bank said that the US economic market enhances the perpetuity of the global economic and financial market. This step was considered to be a pain killer for those looking forward to China’s economic growth. This year China market has lost 59% of its value and $2.86 trillion of its capitalization. Beijing avoided investor’s requests for measures to bring back the losses. Still no step has been taken in this regard. But now there may be an altercation as US has taken an important step recently.

Some years ago, various governments adopted intervention policy when they confronted financial crisis. They had followed such policy to eliminate the root cause of existing lacuna in economy. Hong Kong’s stock market suffered when the prices fell down, at then government invested billions of dollars to bring economy under its control. Malaysia’s government had also intervened asking its stock markets to bring out huge amounts. Both the governments controlled the situation and soon after foreign investors started investing money again in the market.

In Europe, government’s intervention often takes place in to stock market when it slumps down. Recently UK nationalized a bank when it bailed out its failed owner. China also queues up intervening in to its economy which has been its tradition since last many years.

Now it has proved that there were some loopholes in the economic system which is considered to be the back bone of “liberalization”. For the sake of making quick and hefty profit, brokers and marketers invested money in such places which did not yield production and ultimately system collapsed like anything. This turmoil warned the bullies that there is limit of everything no matter it is profit or anything else.

Sanjeev Srivastava

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