Stock markets around the world were rocked last week led by the
United States. The world economy is facing unpredictable risks.
Aftershocks of the US subprime crisis are still being felt, and
are influencing economic entities throughout the world. Where the
world economy is heading depends on when the destructive effects
abate.
International financial markets are always relatively vulnerable
at the start of a year, when even the slightest hiccup can trigger
jitters through markets with stocks tumbling.
Earlier this month, two of America's financial flagships –
CitiGroup and Merrill Lynch – dropped a bomb by releasing reports
of huge losses in 2007. The results were worse than the market
anticipated and caused immediate panic in the US stock market.
As the command center, the Federal Reserve should have responded
in a timely manner to control market jitters or take proactive
measures like cutting interest rates to maintain financial
stability. But Federal Reserve chairman Ben Bernanke lost his
composure. He told a Congressional hearing that the current
subprime crisis had cost the market at least $100 billion and could
reach $1 trillion when other damage is taken into
consideration.
And if that was not bad enough, Bernanke asked the Treasury
Department for financial support instead of relying on the Federal
Reserve's own strength and confidence.
This set off panic in global markets as nerves got the better of
investors who found their confidence in the Fed slipping.
Of course, it was absolutely right for the chairman of the Fed
to tell Congress the truth as required by the "democratic political
process" and "honesty". But the market should also have learned
enough about numbers to remain calm when bad news breaks.
However, when Bernanke, who is considered the "financial
guardian", "threw away his independent authority and esteem" and
sought help from the federal government, it was tantamount to
sending the market the wrong signal. It was practically telling the
market that the Fed had lost its ability to keep things under
control.
Although the Fed eventually woke up and cut the interest rate by
0.75 percent, followed by a basket of emergency measures announced
by the Bush administration, damage had already been done as far as
market confidence was concerned.
Since finance ministers of the five Western powers and central
bank governors began secretly fixing exchange rates and
coordinating financial policies in 1975, the grouping has now grown
to seven members and is known as the "G7". It is safe to say the
"G7" has become the central mechanism for developed countries to
coordinate international financial policies, and indeed, it has
played a vital role as a stabilizing body in the international
financial system.
However, since the US subprime crisis erupted in August, the
"G7" has not been able to play its role as effectively as it used
to. The financial authorities of Japan, the US and the European
Union appear to be clueless, as if beset by unspeakable
problems.
For example, the International Monetary Fund warned the US of
its subprime problem in a report published on August 1. It told the
US to make sure the subprime ills would not wreck its economy. On
August 9, the EU central bank was the first to inject funds into
the market, forcing the Fed to follow suit. Then, on August 11 and
14, Japan's central bank ploughed 1.6 trillion yen into the
financial market but later took it all back in a typical show of
"short-term intervention". Such a move is no different than telling
the market the subprime problem "is just a brief scare".
All this, lest anyone forget, happened despite the pledge made
by the central banks of the US (the Fed), Canada, the EU,
Switzerland and Britain in a joint statement issued on December 12
that they would take concerted action against any financial crisis.
The fact is they not only have yet to take any real action but have
also failed to act in sync.
More perplexing to the market is that the new mechanism does not
include Japan's central bank, which means the "G7" as a
coordination mechanism has been replaced by the five European and
North American central banks without actually saying it out
loud.
The messy international financial policy coordination gave rise
to widespread speculation, sapping the confidence of global
financial markets in Japan-US-EU policy coordination efforts.
In fact, the current subprime crisis is a typical product of the
financial globalization and liberalization championed by the US.
Globalization and liberalization of economic activities should take
place on a level playing field.
But the globalization and liberalization of finance led the US
is based on power politics. Other countries, including Japan, have
no choice but accept the "open market theory" as wielded by the US
"the financial cowboy" of the world.
The US format emphasizes market opening and liberalization of
financial products and trading without a "common system" based on
equality, fairness and negotiations to keep things in order. From
accounting rules, market assessment systems, risk control
procedures, to financial policies and even market terminology,
everything is decided by US. In order to guarantee US capital a
smooth ride anywhere in the world, the federal authorities have
ignored conventional practices in market evaluation and "played
dirty" to whitewash the real risks of such low-credit products as
subprime mortgages.
In the financial market painting over real risks inevitably
leads to investment bubbles. Once it becomes a crisis, even sound
assets could go down the drain. Such is the seriousness of the
current subprime crisis.
The Fed seems to have been fooled by watered-down market
assessments. The subprime crisis may end up bringing the US out of
its wild fantasy and back into the real world, where it has to
pursue "financial globalization" with other nations fairly, openly,
and on a level playing field.
(China Daily January 28, 2009)
