Some weeks ago, Alan Greenspan described the financial crisis as a once-or-twice-in-a-century event. Last week, he called it a once-in-a-century event. It is a great unravelling, the full effects of which are still not known.
A prolonged crisis in global financial markets will badly affect the real economy. Loss of jobs will cause the domestic politics in many countries to turn protectionist. As globalisation generated huge gains in global welfare, a reverse of globalisation will lead to huge losses accentuating the economic crisis further. Thevirtuous circle becomes a vicious spiral downwards.
At times like this, leadership is decisive. Kindelberger in his analysis of the Great Depression identified as one of the key causes the inability of Great Britain to lead any longer. Until the Second World War broke out, the US which could take over the leadership was unwilling to. Roosevelt's New Deal helped but the full restoration of the world economy took place only when war started. In the meantime, Stalinism and fascism reared their ugly heads.
Yesterday's concerted intervention by central banks provided temporary relief. But for global financial markets to be re-established on a sound basis, much more international coordination is needed. The Bretton Woods insititutions need major overhauling. Without decisive global leadership by the US, EU, Japan and China, restoring the global economy will take much longer.
George Yeo
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