Over the past two years, the world has gone through the gravest financial crisis and economic recession since the Great Depression in the 1930s.

The current crisis is similar to the Great Depression of the 1930s in that both are blamed on the Federal Reserve, the central bank of the United States. The Fed kept interest rates unreasonably low and let credit expand, thus distorting market signals.

Alan Greenspan, who chaired the Fed for 18 years, was once dubbed the greatest American banker. But only two years after his retirement, he was widely criticized for many of faults committed by the Fed under his rule: an excessively long period of low interest rates, widespread asset bubbles, and total negligence of the imminent crisis.

The ineffective oversight by the government was also blamed for the spread of the crisis. Weakened government regulatory role in economic life has led to the omnipotence of market forces. As the Great Depression gave rise to Keynesian economics, the financial crisis proved the failure of the economic concept of small government and big market.

Keynesian theory that emphasizes government intervention seemed to prevail again. Yet, it is premature to conclude that Wall Street has come to an end and free market economy failed.

As Chen Zhiwu, a professor of finance at Yale University, put it, "The United States has survived numerous economic crises, yet emerged as the most powerful and creative country in the world precisely because it has adhered to free market economy." By contrast, too much government intervention has caused Britain, an old capitalist power, to lose its competitiveness.

Financial reforms

Chen said the crisis would not change the US economic model, nor end the dominant position of the financial securities industry in its national economy. The only question was how to improve. A close look at the United States, the source of the crisis, indicates that the US government is trying to stimulate economic growth and put forward financial reforms, while striking a new balance in the world economy.

Alan Krueger, US assistant secretary of the treasury for economic policy, told Xinhua that the crisis had made Americans realize borrowing for consumption was not sustainable.

Krueger said the United States has been aware of its financial problems and is conducting reforms such as financial restructuring, enhancing consumer protection and curbing speculation in financial derivatives.

In his September 7 Labor Day speech, US President Barack Obama said the crisis exposed that human greed surpassed responsibility. Legal norms and ethics should be enhanced in the financial sector, he said.

Olivier Blanchard, chief economist at the IMF, said this crisis had left deep scars that would need years to heal. The current recovery was only preliminary and the crisis was yet to end.

The crisis has offered a chance for reflection and further social progress. How to ensure sustainable development after the crisis and how to prevent a reoccurrence of the crisis will put the wisdom of all world countries to a major test. Barry Bosworth, expert on fiscal and monetary policy at the Brookings Institution, told Xinhua that a major lesson of the crisis was "Do not waste it."

(Shanghai Daily September 21, 2009)