Is battling the crisis setting the stage for something worse?

The blog has moved to Dubai today, where the Private Equity International's Middle East Forum is underway and former Pakistani PM Shaukat Aziz is laying out a gloomy forecast for global growth. One interesting observation he is making is that banks have yet to take major haircuts - the massive defaults and restructurings that normally accompany a credit crisis have not yet begun in earnest. Governments are pumping up banks against that eventuality, and some companies are being bailed out so they can pay loans at face value. But the nagging, painstaking and expensive process of debt restructuring has yet to hit. When it does, it will be ugly, but it will be a sign that the body economic is healing. Mr Aziz is also calling for greater leadership from the G20, form anywhere really. Taking up the EU's cudgel, he's asking or the IMF to promote an international regulatory norm to end the regulatory arbitrage that has made the crisis worse and hindered the kind of coordinated response necessary. "We have to fight this together. No country is immune from the impact of ht economic crisis," he said. "The leadership of the world has to show resolve." Does private equity have a role to play? The crowded hall here certainly must think so or they wouldn't have paid to come. There is still capital out there, wounded, whimpering, nursing its portfolios and shrinking from risk. The days of bold, highly leveraged buyouts are over for now, but the world needs the sharp pencils of private equity to circumvent the logjam in the banking sector to mobilize capital and get it to the businesses that need it. This is particularly so in this region. Could we be turning a corner later this year? European central bankers seem to think so, and we can only hope that they're right, that massive fiscal stimulus and lower oil prices arrest the slide in global growth. There is growing skepticism, however, that fiscal stimulus will work. Some economists and policymakers seem to question whether the right course at the outset might have been to allow a shorter, sharper shock to the economy and employment, allowing banks and companies to fail, rather than have governments borrow and spend to soften the fall. Certainly this is a recipe for a faster recovery in the global economy, but it is hard to imagine the political system that could withstand this kind of pressure on the downside. The economy that emerged might well wear a different uniform and fly a different flag that the economy that went into the crisis. An alternative view comes from Europe, where the EU is rejecting calls from Washington, therefore, for further spending. Their fear is that the inflation that stands to be created by a massive expansion of the money supply, designed to reflate the global economy, stands to wipe out savings and foment the very kind of political instability the Obama Administration believes a $1.5 trillion deficit will stem. Europe has its own history to draw from: the hyperinflation of the 1930s helped create the conditions that propelled the Nazi party and Adolf Hitler to power. Policymakers are therefore presented with a choice: Bite the bullet now or bite the bullet later. The Bank of England has chosen the former path, buying back government bonds to engage in what is known as quantitative easing - virtually printing money. warnold@thenational.ae