When world leaders arrive in London for an economic crunch summit Thursday, they will find themselves inundated by hectic media coverage and the global hopes for a panacea for the economic woes.
But those hopes will be chilled if the Group of 20 economies fail to have a clear picture of their policy and system pitfalls before they hustle to find solutions.
Despite the fact that the financial crisis originated from the burst of the U.S. housing bubble, authorities and economists have differed on the causes of the crisis. One of the most compelling arguments is that high savings by Asian countries like China helped fuel the U.S. property boom.
The view was supported by prominent U.S. figures, such as Federal Reserve Chairman Ben Bernanke. The Fed chief said in mid-March that, while the United States failed to effectively use massive capital inflows, its trading partners were also to blame for the global imbalances that were the fundamental causes of the financial crisis.
While Bernanke was brave enough to acknowledge the U.S. and other industrial countries lacked risk management and oversight of the financial sectors, he should have equal courage in revealing the root causes of the crisis -- including drawbacks in the U.S. policy and the current U.S.-dominated international financial system, instead of making wrong links between Asia's high savings and the U.S. overspending.
As China's central bank governor Zhou Xiaochuan cited figures as saying last week: "this round of low savings and high consumption in the United States commenced in mid-1990s, while the savings ratio of east Asian countries only surged after the 1997-1998 Asian financial crisis and China's savings ratios did not begin to increase until 2002. The difference in time distribution indicates there is no significant causal relationship between the two."
The Fed pursued a low-interest rate policy to save the U.S. economy from a contraction in the 1990s, which encouraged excessive spending and was widely accepted as the root cause of the sub-prime crisis.
As Bernanke tried to get other countries to share the duty, he seemed to have neglected another thing: Since the U.S. dollar is the dominant international reserve currency, capital inflows to the United States is inevitable when other countries turned excessive savings into foreign reserves.
In fact, Washington is more than happy to maintain the dominance of the greenback. After China's Zhou called for the establishment of a new international reserve currency that is disconnected from any individual countries last week, the U.S. President Obama and Treasury Secretary Timothy Geithner quickly defended the dollar's position as the top reserve currency.
Although even Zhou acknowledged it will take a very long period to set up a new global reserve currency, the United States and the international community should at least conduct serious introspection on the current system's flaws.
As concerns mounted about possible devaluations of the U.S. dollars because of the Fed's massive plan of buying the country's government bonds to fund stimulus projects, the Obama administration should convince the world of the dollar's strength not only with words but also with actions.
The global financial crisis also exposed the perils of the western financial regulatory idea that "minimal regulation is the best regulation." The followers of a laissez-faire economy should learn the ugly side of the market force: greed can destroy the market's ability of self-recovery, which was proved by the consequences of unchecked development of financial derivatives driven by profit seeking.
In addition, the easy spreading of the crisis should also prompt other countries to readjust their economic restructures that made them prone to the crisis impact. For example, oil-rich countries should act more aggressively to make their economies less dependent on crude while big exporters like China to shift growth model to rely more on domestic demand.
As the big summit nears, it remains uncertain how much common understanding can be reached or what concrete results will be achieved by leaders of the 20 rich economies and developing countries at the London gathering.
The United States has urged bigger stimulus spending and Europe wants more focus on financial regulation, while emerging economies like China seek a bigger say in the international financial system. There may be common ground in avoiding trade protectionism. but current international rules allow a large room for protectionism by the back door.
One thing is for sure: to end and avoid a replay of an economic turbulence of such scale and depth, all sides need a rational rethinking of their policies -- and that takes courage.
(Xinhua News Agency April 2, 2009)
