Without Growth Stimulus, World Plunges into Crisis


10-27-08, 9:23 am

Original source: l'Humanite

The US Federal Reserve and the European Central Bank (ECB) lowered interest rates while the markets were in free-fall Wednesday morning, panicked by the continued financial crisis and its repercussions on the general economy. Heads of state maintained their plan, supporting banks and finance, but with no measures to help consumers. Fears of a depression have returned.

The US Federal Reserve announced a 0.5 percent decrease of its direct rate Wednesday, to 1.5 percent (from two percent). The ECB decreased its principal direct rate to 3.75 percent from 4.25 percent.

Rate Decreases Do Not Stop the Slump

These decreases were planned. Indeed, the decrease in the Fed’s direct rate occurred simultaneously with the decreases from most of the central banks, particularly the ECB, the Bank of England, and the Bank of Canada. Meanwhile the world’s financial markets, worried by the impact of the financial crisis, continued their collapse.

This announcement came while alarming news arrived from financial sources. At the end of the day, Paris lost 8.18 percent, the CAC 40 index falling to its lowest level since December 2003 ; Frankfurt lost 7.41 percent, Mila 6.11 percent, and Amsterdam 9.05 percent.

In Moscow, The RTS and MICEX stock exchanges stopped trading 35 minutes after opening after 11.25 percent and 14.35 percent drops.

The European exchanges were also experiencing record lows.

After the announcement, the world’s exchanges, completely off course since Monday, had a moment of respite, and the Euro turned around.

But less than two hours later, pessimism returned. In Frankfurt, the DAX lost more than four percent, as well as the CAC 40 in Paris, and the Footsie in London. And Wall Street opened down over two percent.

For those involved in the market, this step is important, but not enough. For many economists, the action taken by the central banks is not a miracle cure.

'The effects of the decreased interest rates on market fundamentals will not affect investments for a year,' says Sylvain Broyer, an economist at Natixis, who attributes a 'psychological effect' to the measure.

The real problem is that credit is rare, due to a climate of mistrust in a market affected by the banks’ problem.

After the Paulson Plan, a Brown Plan for Europe?

Earlier, on Wednesday, Great Britain had launched a European support plan for the banking sector and asked for a European rescue plan without keeping the world exchanges from their hellish descent.

British Prime Minister Gordon Brown announced, on Wednesday, that he had 'invited' the other members of the European Union to adopt a 'European Finance Plan' for the banking system.

He noted that he was 'in active consultation on a European finance plan' and had discussed it early that morning with French President Nicolas Sarkozy. The idea of a European plan, suggested last week by France, was firmly rejected by Berlin, which prefers a national approach.

London announced a huge banking rescue plan that consists notably of a partial nationalization of the country’s biggest banks by acquiring a stake in the banks of up to 50 billion pounds (65 billion euros).

The eight banks involved are Abbey, Barclays, HBOS (currently being bought out by TSB), Nationwide Building Society, Royal Bank of Scotland and Standard Chartered. All have confirmed their participation in the recapitalization scheme.

Great Britain’s Minister of Finance, Alistair Darling, also announced the release of a 200 billion pound line of credit (260 billion euros).

'It’s an important step for the future, but it is not the only one,' Mr. Darling affirmed on the Skynews channel. 'I am excluding nothing, we’ll do what we have to.”

But the governmental initiatives, which have proliferated since the Paulson plan, an allocation of $700 billion, last Friday in the US, seemed unable to check the downward spiral of the markets.

Toward a Depression-Recession?

Even more serious is the resurgence of the fear of depression. The various measures taken by the US to stabilize the financial system would normally have an inflationary effect, but for economists, the biggest danger is depression, at least in the short term.

Washington’s combined initiatives taken to avoid the collapse of the US financial system may approach $2 trillion.

“If it doesn’t work, we will obviously be worrying more about depression than inflation,' said Brian Levitt, an Oppenheimer Funds economist.

The collapse of the markets and of real estate prices, and the increasing difficulty businesses and families are having in obtaining credit, are not inflationary elements, nor is the decline, of some fifty dollars, in crude oil prices in the last few weeks.

For some, these events may seem a reminder of the long US depression of the 1930’s, characterized by the fall of demand, huge price decreases, and an inevitable increase in unemployment.

And foretelling indicators seem to be going in that direction. Consequently, the World Monetary Fund, last Wednesday, revising its initial predictions of world wide economic growth for 2008, now anticipates a slight decrease in its estimations from 4.1 percent to 3.9 percent, for July, and a sharp decrease for 2009, from 3.9 percent to 3.0 percent.

In its account on the 'world economic prospects', published several days before its fall meeting, the WMF indicates that 'The world economy is approaching a major turning point, facing the most dangerous stock market crash since the 1930’s.”

The IMF predicted a US recession, whose GNP should increase by 1.6 percent this year (as compared to the 1.3 percent predicted for July), but only 0.1 percent in 2009 (down from 0.8 percent). The IMF foresees that the world’s largest economy could shrink in the 4th quarter of ’08 and in the 1st quarter of ’09.

The Euro Zone will barely fare better, with 1.3 percent this year (as compared to the 1.7 percent predicted three months ago), and 0.2 percent next year (instead of 1.2 percent). France is one of the countries whose predicted GNP has been decreased the most. France will see very slow growth in 2008 (0.8 percent rather than the 1.6 percent predicted earlier), and in 2009 (0.2 percent instead of 1.4 percent).

A Third 'New Deal'?

In this context, those who demand stimulus plans for consumers and rigorous credit regulation to support growth – some even talking about resuscitating the 'New Deal' – are not always heard It was, however, the solution that capitalism ended up adopting during the Great Depression of 1929. Will we wait for equally dire consequences such as those in that crisis before we finally resolve ourselves to that solution?

--Translated by Jennifer Schmid.