Sunday, October 05, 2008

Global Money – Road Ahead

With Europeans not particularly on the same page as far as a united response to European Financial Bailout, the treacherous road ahead is becoming more apparent.

Here are some signs about how hard the road of recovery will be:

- Even though finally American Congress and Administration moved to pour $700 Billion to shore up finances of banks in USA (American or foreign; both included); there is already a talk about how either this may not be sufficient or will still not stop the looming severe recession.
- As ‘decoupling’ theory quietly recedes in background; other financial centers like Dubai, Shanghai, Hong Kong, Moscow; all are under pressure. Europeans are already in bailout mode and are aware that more money will have to be sunk in mopping up the mess on the old continent.
- Since American consumer would not have any more juice available in her ATM (home equity loan financed via CDOs bought by rest of the world), export to America will slow; slowing China and rest of the export based economies. This means, at least for 2009 slow global economic growth is unavoidable making any recovery that much difficult.

But in any case these are simply short term challenges. Long term, some of the challenges are:

- How do you regulate around 60 Trillion dollars of credit swap trades so that it does not pose a threat to global financial stability?
- Since CDO route of financing mortgages will be less available in future, how soon governments will bring Shiller fame ‘continuous mortgages’ in the market as banks start to retain these loans on their books?
- Rating agencies share a fundamental blame for this fiasco since these agencies blithely rated CDOs. How will more transparency, accountability and competition be brought to ‘rating’ business?
- Can dollar continue it’s ‘reserve currency status’? If not, what is the alternative?
- Finally, as the noted currency trader Mark Chandeller points in RealMoney.com; can we start stipulating that ‘financial recession’ will be as recurring a phenomenon as ‘business recession’? Modern financial structures have been evolving to address the later type of recession (Fed fights inflation primarily but lubricates the economy by lower interest rates in times of business led recession). But global money system does not have any mechanisms to address ‘bank runs / financial meltdowns’ in any systematic manner. Any solutions there? Permanent ‘bailout corpus’ contributed by all nations? Equivalent of FDIC at global level? What can be that solution?

Politics of this will get started slowly in respective countries. For USA, within a month it will be clear what kind of ‘mandate’ is available to address these challenges. As elections take place in other countries, things will be clearer too. (China is the exception.) The question is about ‘beyond politics’ what are the measures to get out of this mess and will there be necessary international co-operation to undertake these complex tasks.

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