Ministers speak to pressure groups
Ed Miliband, Energy and Climate Change Secretary, has met pressure groups involved with the London `Put People First’ march on Saturday 28th March, which aims to highlight concerns over the impact of the global crisis. `I think the kind of campaigning that people are engaged in today … is the kind of peaceful protest that is very much part of our society,’ he told the BBC
Strengthening the regulation of the financial services sector is one of the objectives of the London Summit. The Road to the London Summit, included proposals for reshaping the global financial system – including to close regulatory gaps and the improve the management of risk. In the run-up to the Summit, measures to tackle some of these issues have been agreed in preparatory meetings.
The credit crunch began in the autumn of 2007 because of the sub-prime housing crisis: banks began to realise they had lent a lot of money for buying homes to people who would not be able to repay it all. In the following months, growing fears about many of the assets banks had financed led the financial system to freeze up, leaving banks short of cash to lend. Confidence collapsed in the wider banking community and has yet to be restored, because the scale of the bad debts is still very hard to quantify.
Credit rating agencies have come in for a lot of criticism since the start of the credit crunch, with many of the investments they rated as good credit risks plunging in value. The value of mortgage-backed securities with an AAA rating – supposed to be the lowest risk – fell 70 per cent between January 2007 and December 2008. This has raised questions about how they operate, which feed into the group of issues on the transparency of financial markets that is a subject for discussion ahead of the London Summit.
Governments around the world have taken unprecedented action in response to the global financial crisis and the economic downturn. Understanding that a return to business-as-usual growth will leave them vulnerable to rising oil prices and the potentially catastrophic impacts of climate change, several have committed sizeable parts of their economic recovery packages to low carbon investments. Their aim is to ensure a resilient recovery that leads to steady and sustainable growth.
Part 2: The need for concerted monetary stimulus
The global economy is going through a pronounced contraction in demand. The International Monetary Fund forecasts that economic growth will expand by just 0.5% this year, the weakest since the Second World War. Some countries, particularly advanced ones, will see sharp contractions in demand and growth. For example the eurozone is expected to contract by 2.0%, the United States by 1.6%, the United Kingdom by 2.8% and Japan by 2.6%. Average economic growth in emerging and developing economies is expected to remain positive at around 3.3%. However, a number of key emerging economies are expected to experience a sharp slowdown compared to growth rates they have experienced in recent years.
If there is one issue that unites many countries around the world, it is a fear that the financial crisis and the resulting economic downturn will lead to a rise in protectionism – measures to protect domestic producers from foreign competition. Protectionism in the 1930s was widely thought to have deepened and prolonged the Great Depression, which provided the impetus for decades of post-war free trade negotiations under the auspices first of Gatt (the General Agreement on Tariffs and Trade) and more recently the World Trade Organisation.
Governments are now dealing with the deepest and most synchronised global recession for several decades. In this climate, authorities in different countries will need to use the full range of macroeconomic tools as part of the recovery. As the crisis has unfolded there is increasing consensus among economists and Governments that fiscal policy has a key role to play in tackling the economic crisis.
Robert Zoellick, President of the World Bank, has said that developing countries can be part of the solution for the global economic crisis, but they also need protection from its impact. In an interview with the Editor of the Financial Times, Mr Zoellick renewed the call he made before January’s meeting of the World Economic Forum in Davos for the developed countries to create a ‘Vulnerability Fund’ to support the poorest and most vulnerable people around the world.
Globalisation has meant that products made in one country are routinely shipped around the world to the customers who buy them or incorporate them in their products. Those customers will be reluctant to pay for goods until they have been delivered, while suppliers will be reluctant to send their products unless they can be certain of being paid. Roughly 90 per cent of world trade relies on some form of short-term credit, insurance or guarantee to keep the supply chain moving – most of it provided by banks.
The IMF was born of the Bretton Woods discussions in 1944 and charged with overseeing the international monetary system and ensuring global economic stability. The organisation’s membership has grown dramatically from 29 members in 1945 to 185 members today. Whilst this growth is proof of the IMF’s central role in the international system, it has also been a continuous challenge to ensure that the organisation is fairly reflective of its ever-increasing membership.
The global economic crisis has exposed the need for action to enhance the stability and resilience of the global financial system. In April 2008, the Financial Stability Forum submitted to G7 finance ministers and central bank governors a comprehensive set of recommendations for addressing the weaknesses and strengthening the system. A follow-up report in October reported on progress in implementation of the April report’s recommendations and identified several additional issues to be addressed.