The devastation of Wall Street marks the end of an era of easy credit and the beginning of a long period of more difficult global growth.
Era of slower growth emerging
TIANJIN, China // While the US government appears likely to push through a rescue package this weekend to arrest the crisis in financial markets, the devastation of Wall Street marks the end of an era of easy credit and the beginning of a long period of more difficult global growth. "We've got to get used to living in a slower growth environment where the emphasis is not on the quantity and speed, but on the quality and balance of economic growth," said Stephen Roach, the chairman of Morgan Stanley Asia.
Mr Roach and the other economists, executives and officials gathered for a World Economic Forum (WEF) programme here offered a sobering assessment of economic prospects in what some call the worst financial crisis since the Great Depression. Emerging markets such as China and the Middle East may grow, they said, but money to finance that growth will be harder to find. Poor economic conditions are prompting a rise in protectionism that threatens to roll back the benefits of globalisation and freer trade, they said. The vast pools of savings in Asia and the Gulf will have to fill the void once dominated by giant western investment banks.
"We are looking now to the larger, faster-growing economies to take up the slack," said Peter Mandelson, the EU's trade commissioner. "We need them to be sources of liquidity, of demand, of investment, of confidence in the global economy." Participants expressed hope that authorities would find some way to develop a co-ordinated international regulatory system broad and nimble enough to keep up with the rapidly shifting global financial environment.
The past few weeks have seen the dramatic breakdown of an economic engine that has driven global growth since the end of the Second World War, experts here said. In a series of panels, workshops and briefings at the WEF's Annual Meeting of the New Champions, participants in the meeting pieced together a virtual autopsy of a system in which, at its most elemental, the developing world lent its savings to the American consumer, who, instead of saving, provided seemingly endless demand for imported goods.
The US economy grew swollen and addicted to imported oil, imported manufacturers and most of all, imported credit. Unable to spend their export earnings effectively at home, Asian and other emerging market governments instead recycled their money back to America, buying bonds from American companies, lending agencies and the government. This constant stream of dollars kept US interest rates relatively low despite America's growing mountain of debt and trade imbalances.
The accumulation of savings on one side of the Pacific and debt on the other helped to finance a remarkable transformation of the global economy in just a few generations, from the rebuilding of Europe and Japan's meteoric rise to industrial power, to the Asian miracle and China's re-emergence as the world's factory. Easy credit has created economic booms in parts of the world once thought of as economic backwaters: Russia, the Middle East and Africa.
Easy credit created asset-priced bubbles that spawned a series of financial crises. The first of these was the tech bubble, which collapsed seven years ago, and today's crisis could be seen as yet another consequence of the same phenomena. To stave off recession, the US lowered rates and increased spending. With Japan still offering interest rates near zero after its own financial crisis a decade before, investors moved rapidly into more remote and riskier markets.
That bonanza of liquidity helped many of the poorest economies to dig their way out of debt. But the falling price of money also encouraged bankers and asset managers to seek increasingly risky investments to deliver high returns to investors. In the US, their solution was the subprime mortgage, a loan to people with poor or no credit histories, and the packaging of them and other risky loans into complex and unregulated credit derivatives.
Thought to reduce the risk to investors of a decline in property values, the derivatives ultimately had the opposite effect. "It's over now," Mr Roach said of the credit-fuelled, American consumption boom. "The American consumer is toast, done, finished. There will be consequences for other nations who like to sell things to Americans that they don't need and can't afford." Most immediately, experts said, the collapse of Wall Street and the costly rescue being proposed by the US government had created a global shortage of capital. "Who will provide capital?" asked Yoshihiko Miyauchi, the chairman and chief executive of the Japanese finance company Orix. "This turmoil will last longer than most people expect," he said. "And everybody is affected because of the borderlessness of financial markets."
The danger is that the receding tide of credit deprives fast-growing emerging markets of the capital needed to finance ambitious infrastructure and urbanisation projects. While many emerging markets have no shortage of domestic wealth, much of it is invested abroad. Local financing has instead relied on the abundant flow of global funds. That is now reversing. Panelists in one session, for example, described how foreign investors pulled out 90 per cent of their deposits - an estimated US$100 billion (Dh367bn) - from the UAE in the space of just two weeks, forcing banks to rein in credit. A similar phenomenon is hitting emerging markets from Russia to South Korea.
"Insulation is illusory because a lot of capital in Asia has come from developed markets," said Zakir Mahmood, the president and chief executive of Pakistan's Habib Bank. With foreign credit retreating, experts said, the onus would be on emerging markets to deploy their own piles of cash. Already, companies are turning to these cash-rich economies not only for demand, but for investment. "We have to look at where the money is - and that's sovereign wealth funds," said Thomas Enders, the chief executive of Airbus, which is scheduled to open its first foreign aircraft assembly plant in Tianjin today. "You see major companies touring those countries that have the funds."
Sovereign wealth funds in the Gulf, China, Korea and Singapore will therefore play an increasingly vital role in the global economy, participants said. Japan's banks, in particular its recently privatised postal bank and its estimated $3.3 trillion in public savings, appear ready to become another important source of investment. Ultimately, participants said, a new global financial architecture was needed to prevent the kind of excesses that led to the current crisis. Compensation for executives and bankers needs to somehow reward sustainability as opposed to short-term profits.
Central banks and securities regulators, moreover, will need to devise international regulatory norms that will prevent the kind of "regulatory arbitrage" that enabled banks to elude scrutiny of how they were managing - or mismanaging - risk. "It's not the markets that are fundamentally wrong. It's not globalisation that is fundamentally wrong. It's risk," said Mr Mandelson. "We've got to manage the risks much better, not by smothering the global economy and financial market system with layer upon layer of regulation, but with smart regulation, smart people regulating it and knowing when they have to step in and when to step out." @Email:email@example.com