The 2008 financial and economic crisis

Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give high-risk loans to people with poor credit histories. These and other loans, bonds or assets are bundled into portfolios - or Collateralised Debt Obligations (CDOs) - and sold on to investors globally.
Meanwhile, market evolution lead to falling house prices and rising interest rates. Therefore, a high numbers of people who cannot repay their mortgages appeared.

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Investors suffer losses, making them reluctant to take on more CDOs. Credit markets freeze as banks are reluctant to lend to each other, not knowing how many bad loans could be on their rivals' books. This mistrust led the US Federal Bank and the European Central Bank to try to bolster the money markets by making funds available for banks to borrow on more favourable terms. Interest rates are also cut in an effort to encourage lending.
But the short-term help didn’t solve the liquidity crisis as banks remain cautious about lending to each other. The lack of credit - to banks, companies and individuals - brings with it the threat of recession, job losses, bankruptcies, repossessions and a rise in living costs.
Great Banks seeked an emergency loan to stay afloat, prompting a "run" on the bank, as worried by customers withdrawal. Goverments started their own bailout, making extra capital available to the largest banks and building societies in return for preference shares in them. In return for its investment, the government expects to get a stake in the banks - although exactly how much is not quite clear yet. Economies around the world are affected by the credit crunch. Governments move to nationalise banks from Iceland to France While bank shares have been hammered because of bad debts, retailers have been hit as consumer confidence is shaken by falling house prices and job insecurity.

World Economic Situation and Prospects - UN 2010

In developed economies, consumer and investment demand remains subdued as a result of a continued rise in unemployment rates, efforts by households to restore their financial balances following the wealth losses incurred during the crisis, and the reluctance of firms to invest while capacity utilization rates are low and credit supplies remain tight. Furthermore, the impetus from the stimulus measures and the turn in the inventory cycle are expected to diminish over time.
The major developed economies are not expected to provide a strong impulse to global growth in the near term, growing at a moderate 1.3 per cent on average in 2010
Output growth in the developing countries, in contrast, is expected to recover at a faster pace but will remain well below the pre-crisis pace. Growth in most developing countries and economies in transition remains highly dependent upon movements in international trade, commodity prices and capital flows.
While country-specific conditions differ markedly, the global crisis has undermined investments and, hence, the growth potential of their economies. Many of the least developed countries (LDCs) are expected to see a much slower economic performance in the years ahead compared with the robust growth they witnessed in the years before the crisis.

- Labour markets
The impact of the financial crisis on labour conditions is expected to aggravate social gaps in employment opportunities, in particular for women, who are more often involved in temporary employment and jobs in export-oriented manufacturing industries in developing countries. Worldwide, unemployment among youth (those 16-24 years of age) is expected to increase from a rate of 12.2 per cent in 2008 to about 14 per cent in 2009 on average In developed and developing
countries alike, an increasing number of new college graduates continue to face enormous difficulties in finding employment.

Labour markets will remain weak in the outlook. The experience of previous recessions shows that employment recovery typically lags output growth by a significant margin, and this margin has been growing over time.

- Impact on poverty and human development
Between 47 and 84 million more people are estimated to remain poor or to have fallen into extreme poverty in developing countries than would have been the case had the crisis not occurred.
Major setbacks in the progress towards the achievement of the other Millennium Development Goals (MDGs) are also to be expected, especially for the vulnerable populations in low-income countries.

Uncertainties and risks of the economic outlook:

1) A premature exit from the stimulus measures could cause a double-dip recession
The first risk is associated with a premature exit from the strong stimulus measures that helped halt the free fall of the global economy and that are supporting the incipient rebound.
- The stronger-than-expected rebound in equity prices worldwide may belie the fact that there are still problems remaining in financial sectors in major economies which continue to constrain credit availability and could lead to more failures of financial institutions in the near future.
- Levels of trade flows and industrial production are still well below the pre-crisis peaks and the temporary rebound is related more to a turnaround in the global inventory cycle than to a recovery of private consumption and investment.

Understandably, there is increasing concern that the substantial widening of fiscal deficits and mounting public debt could become a drag on future growth, and fiscal consolidation may therefore be needed sooner rather than later. While such concerns are justified, a premature withdrawal of the stimulus could prove to be counterproductive.

2) Renewed widening of the global imbalances
There is also a risk of a return to widening global imbalances. The global financial crisis and the worldwide recession have led to a recessionary adjustment of imbalances in current accounts across countries, with imports falling steeply in deficit countries (led by the United States) and export earnings collapsing in most surplus countries.
In most surplus countries, especially in developing Asia, growth continues to rely heavily on exports and high savings rates, leading to relatively weak domestic demand and high reserve accumulation. In the major deficit countries, particularly the United States, private savings have increased as consumers have become more cautious, but not by a sufficient margin to cover widening fiscal deficits and prevent mounting public indebtedness. The external deficit is therefore expected to widen again.
The value of the dollar had been on a downward trend since 2002, but it rebounded in the second
half of 2008 through the end of the first quarter of 2009. Since March 2009, however, the dollar has resumed its downturn as a result of the stabilizing conditions in global financial markets. At the same time, investors started to become increasingly concerned about the rise in the budget deficit and the worsening of the net foreign investment position of the United States. In all probability, however, eventual adjustment would not be gradual and eroding confidence in the world’s major reserve currency would first lead to substantial exchange-rate volatility which could subsequently escalate into more abrupt declines and a hard landing of the dollar.

Policy responses and challenges:

Since the intensification of the financial crisis, Governments worldwide have taken bold actions. Massive public funding has been made available to recapitalize banks, taking partial or full Government ownership of ailing financial institutions and providing ample guarantees on bank deposits and other financial assets.
Furthermore, monetary and fiscal policy stances have been strongly counter-cyclical in most major economies, as has been reflected in the drastic cuts in policy interest rates and massive liquidity injections and fiscal stimulus packages. These policies have been effective to the extent that they have helped to stabilize global financial markets, support global effective demand and alleviate the economic and social impact of the crisis. Yet, these unprecedented responses have not been sufficient to induce a self-sustained process of recovery.

- Continued fiscal stimulus is needed in the short run
The immediate challenge for policymakers will be to determine how much longer the fiscal stimulus should continue. Given the risk of a double-dip recession resulting from a premature withdrawal, the stimulus should continue at least until there are clearer signals of a more robust recovery.

- Sustainable global rebalancing needs to take place
To avoid a return to the unsustainable pattern of growth that led to the global crisis and to sidestep the risks of a double-dip recession and a hard landing of the dollar, three forms of rebalancing of the global economy would need to take place over time.
- First, the pressure on Governments to hold up global demand would need to diminish over time through renewed impulses from private demand.
- Second, the composition of aggregate demand would need to rebalance to shift greater weight to investment in support of futureproductivity growth and the transformation of energy sectors and infrastructure requie to meet the challenge of climate change.
- Third, demand across countries will need to be rebalanced.

Stepping up public and private investment to address climate change could well be an integral part of the process. Large-scale investments in energy efficiency and renewable energy generation will need to be made now in order to achieve the scale effects needed to lower the cost of green technologies and effectively achieve low-emission growth paths. Such investments will also be needed in developing countries, where energy demand should be expected to increase starkly along with their efforts to reach higher levels of development. Furthermore, substantial investments
will need to be made for climate change adaptation, especially in developing countries which are already being affected by adverse effects of global warming.

- Global governance should be strengthened on four fronts
To support the enhanced framework for policy coordination, further progress on global economic governance reforms will need to be made on four related fronts.
1) First, multilateral surveillance by the IMF will need to be extended well beyond the traditional emphasis on exchange rates, to address broader macrofinancial surveillance and also to monitor
the “sustainable rebalancing” process of the global economy as outlined.
2) Second, more pervasive progress on governance reform of the IMF will be needed to add legitimacy to the institution’s enhanced role in this respect and also for mediating multi-annual agreements. Mediation to achieve consensus on the main targets for policy coordination is
unlikely to be successful where doubts exist about the impartiality of the mediator. In this context, the reform of the governance of and representation in the IMF has become all the more urgent and important so that seats in the Executive Board and votes in the Fund better represent developing country interests in the decision-making process that is under way.
3) Third, while the ongoing crisis has given strong impetus to macroeconomic policy coordination, there is no guarantee that all parties will remain committed to agreed joint responses. Having clear and verifiable targets for desired policy outcomes will help make parties accountable, and the possible loss of reputation through non-compliance should be an incentive to live up to policy agreements.
4) Fourth, sustainable rebalancing of the global economy will require close coordination with other areas of global governance, including those related to development financing and the multilateral trading system, as well as with the United Nations Framework Convention on Climate Change. No specific mechanism for such coordination exists at present, and the creation of such a mechanism would need to be considered.

- Urgent progress is needed in reforming the global financial system
The global financial crisis has further exposed major deficiencies in the international financial architecture, as well as failures of regulation and supervision at national levels. As the global economy recovers, more, rather than less, urgent efforts will be needed to spearhead reforms of international and national financial systems so as to prevent a similar crisis from recurring.

- The risk of exchange-rate instability and a hard landing of the dollar could be reduced by having a global payments and reserve system which is less dependent on one single national currency.
One way in which the system could naturally evolve would be by becoming a fully multi-currency reserve system. The advantage of a multireserve currency arrangement is that it would provide countries with the benefit of diversifying their foreign-exchange reserve assets.
- However, it would not solve the problems of the tendency towards the emergence of important global imbalances and the related deflationary bias in the macroeconomic adjustment between deficit and surplus countries.
Such deficiencies could be more readily overcome by pursuing the transition to a reserve system based on a true form of international liquidity, such as by expanding the role of special drawing rights (SDRs). Doing so would, in fact, fulfil the objective included in the IMF Articles of Agreement of “making the special drawing right the principal reserve asset in the international monetary system” (Article VIII, Section 7, and Article XXII).

An SDR-based reserve system would also provide a basis for a better pooling of international reserves, as international liquidity would be made available on a counter-cyclical basis, reducing the need for individual countries to hold costly amounts of reserves on their own.


The response to the financial and the economic crisis

Reaction to the financial crisis. Greek experience: back to agriculture

The financial crisis has devastated Greece. Economy has stopped, unemployment and inflation have increased, leaving people poorer and poorer.
But some Greeks have decided not to surrender and seek a solution to economic depression outside the conventional economy.They have decided to return to traditional agriculture. This agriculture is less intensive, environmentally friendly and it allows farmers to keep under control the crops. It eludes international financial speculation on the prices of agricultural commodities, because is under the level of international financial markets.
In addition to that, the return to traditional agriculture allows maintaining and preserving biodiversity. Through this "back to basics-experience” many people have lifted out from poverty and unemployment. Symbol of return to traditional agriculture and less intensive farming is the exchange and sharing of local seed varieties.
Intensive agriculture creates a loss of diversity, biological and social. This erosion of diversity directly limits ecological and social resilience and adaptability within world. According to the United Nations Food and Agricultural Organization, crop genetic resources are disappearing at the rate of 1 to 2 percent a year. About 75 percent of agricultural crop diversity is estimated to have been lost since the beginning of the last century.
Reacting to this loss is possible through the defense of the seed sovergnity: it means sharing local seed varietis. seed sovergnity means also food security because it allows little farmers all over the world live with profits from their cultivations.
Seed laws in Europe are to be changed in 2011. The seed industry wants to extends its intellectual property rights and the patenting of crop varieties. It lobbies for stronger control and even the prohibition of farmers' non-registered varieties.
Ten companies, among them Bayer, Monsanto, Syngenta and Limagrain, already control 67% of the world seed market. They no longer want to miss out on the rest of the market when they could impose their registered varieties - which usually only thrive with the help of chemical fertilizers, pesticides and irrigation - upon the rest of the world. However, it is not these genetically homogenous industrial seed varieties which will be able to feed the world in the future, but the diverse, regional varieties which are able to adapt to climate change.
Financial crisis has been a boost for greek farmers to react to monoculture and intensive culture and to go back to traditional ecofriendly agriculture.
And they started from seeds: last 23 April at Paranesti (near Salonicco) was organized the 12th Festival of exchange and sharing of local seed varieties: a meeting of 7500 farmers to exchange seeds and landraces.

a video- reportage of this event:

Focus on: Biodiversity

90% of the human race's diet of animal origin comes from just 14 species of mammal and bird, and just four species - wheat, maize, rice and potatoes provide the organism with half of its energy from plant origin. The FAO estimates than in the last century, three quarters of the genetic diversity of agricultural crops have disappeared. What's more, of 6300 species of animal, 1350 are at risk of extinction or are already extinct. Modern agriculture has encouraged many farmers to use the same high yielding species of plants or animals, but when food producers abandon diversity, varieties and species can disappear, along with their specific genetic characteristics. For poorer farmers, biodiversity may offer the best protection against starvation. Consumers may also benefit from the possibility of a wider choice of plant and animal foodstuffs, meaning they can enjoy a nutritious diet, which is particularly important for local communities with little access to markets.
More than 40% of land is used for agriculture, and therefore its farmers are the most responsible for protecting biodiversity. Through the use of techniques such as agriculture on untilled land, reduced use of pesticides, organic farming and crop rotation, farmers can maintain the fragile balance between their land and the surrounding ecosystems.

Focus on: Food sovereignty

“Food sovereignty is the right of a population to healthy food which is culturally appropriate, produced using sustainable and ecological methods, supported by their right to define their own food and agriculture policies”; this is the definition of “food sovereignty” provided by the Nyeleni Forum 2007 (Mali).
Food sovereignty offers a strategy for resistance and the demolition of the current food commerce system sustained by corporations, a strategy which is directed towards food, agricultural, pastoral and fishing systems centred around local producers and users. It also gives priority to local and national markets and economies; it promotes transparent business which ensures equal profits for all, as well as the right of the consumer to control their own nutrition. It ensures that the right to use and manage land, territories, water, seeds, livestock and biodiversity are in the hands of those who actually produce the food. Finally, food sovereignty “means new social relationships free from oppression and inequality between men and women, populations, ethnic groups, economic classes and generations”.

Reaction to the financial crisis. China experience

China became a political and economical power thanks to several policies implemented in these last decades which make it one of the few country that are able to face the crisis.

Regarding the economical growth, the most important steps were the OPEN DOOR POLICY, the GO GLOBAL PLAN and, as a confirmation of both, the ENTRANCE in WTO.

In 1979 the Chinese Government tried to encourage the expansion of international economic relations, through the progressive opening up of the country to foreign investments. This policy was known as OPEN DOOR POLICY. It passed the problem of autarchy in the Maoist period and the risk of internal interference by investors. This policy was characterized by foreign trade, foreign direct investments and international loans: the “special economic zones” were the place for verify the consequences of a free market economy. In these zones were provided preferential treatments for foreigners who wanted to invest in China and was also provided favorable conditions in terms of taxation. The open door policy has led in China a huge influx of foreign investment and this gave an incentive to foreign trade. The reforms introduced the so-called “Socialist market economy”, a new economic structure which mixed socialism, that held the administrative and institutional structure, to an economic system which provided free market and free trade. In other terms, this definition of “socialist market economy” indicated that Communist Party continued to exercise a strong control in important economy’s sectors together with a gradual opening up in the economy.

After several years of solid increase, due to the OPEN DOOR POLICY, China was able to implement a new strategy called GO GLOBAL PLAN. It is characterized by an opening up to the world (even more than before) and by investments in private initiative. Regarding this last, China recognized that enterprises are the primary component of economic development. Consequently it started to create opportunities (different taxation, credit policies,…) to invest both in the country and abroad. Go Global Plan consists also in rationalization of the administrative process, reinforcement of the economical and political diplomacy and attention to the information and promotion’ sectors.

Go Global strategy has success and China nowadays is an important investor with more outward flows than inward flows. The entrance in WTO (2001) was expected. This entry is important because forces China to accept international rules, aims and standards. It is not easy. Even if the Country ratify TRIPS agreements, there are other important goals to reach as the respect of Workers’ Rights and environment’s standards, but also the reduction of poor (China is at the 96° place of GDP per capita list).

The current economic crisis is making clearer the economic power of China, power gained with the policies implemented in the past years. China is in an overgrowth economic situation. Although the most recent data show a slight drop, it usually had 8-9% annual growth rate in recent decades. An extraordinary development started from its opening to global trade and surely its particular growth is also due to the controversial structure of its domestic market. While developed countries lose their investments potential, China continues to have and increase the power to invest. The sectors where China usually invests are tertiary (bank and insurance), financial and mining. As the difficulty of developed countries, China invests in developing countries. Excepting tax havens, we know how the biggest part of the developed countries’ investments are directed to developing countries, among these the African States. The crisis has also defined the priorities of the country. They are:
  • Need for energy resources
  • Search for new markets and costumers
  • Make new corporations
  • Break down the costs of labour by delocalization

Some possibile responses to the global financial crisis

The impact of the global financial crisis has been different among different states: in particular, economies exposed more to the real estate (a sector where the importance of the banking system is crucial) bubble have been suffering more that other states. The initial response given in particular by the U.S. banking system has been a severe credit restriction to families and enterprises, causing a big fall on the demand side. Then some corrective measures have been applied, like the reduction of interest rates, but structural problems were not solved.
Assuming that definitive and certain responses to the crisis do not exist at the moment, probabily some plugging measures for the recession could be expansive monetary and fiscal policies to push the recover in the whole economy. What can now be done is the adoption of some short period responses to slow down the crisis as primary goal and to create a solid base for recover in the long period.
1. Central banks need to provide an appropriate level of liquidity to financial istitutions so they will not sell it own assets to gain money.
2. Banks need to take new assets and make recapitalization
3. Recreate and support the confidence on the banking system
4. Rember that the fiscal policy is crucial in this mooment of crisis
5. Push internal consumption through an higher level of public expenditure and lower taxation
6. Mantain control over the rise of public debts sector
6. Help especially people in need

China is an example of how the govenrment can sustain its economy through specific measures: in 2009 the government has adopted a stimolous plan of 586 billion dollar in two years and has increased the public expenditure, thanks to a big surplus in the trade balance.
Also the EU has adopted some responses to the global crisis: the EIB (Eurpoean Investment Bank) increased his annual intervention in the EU with 15 billion dollars in addiction, making available new loans, equity and liquidity.

The global financial crisis has to be analyzed and solved considering his global dimension: only through the collaboration and the partnership between U.S., EU and the major international istitutions (FMI, WB) and actors this crisis can be solved.