Global Impact of Economic Crisis and the G-20
|Last week beginning on March 31st in London, the G-20 began its most important meeting since inception. The G-20 is an informal forum that promotes open and constructive discussion between and among industrial and emerging-market countries on key issues related to global economic stability. Together, member countries represent around 90 per cent of global gross national product, 80 per cent of world trade, as well as two-thirds of the world's population. The G-20's economic weight and broad membership gives it a high degree of legitimacy and influence over the management of the global economy and financial system. The name G-20 derives from its composition of representatives from 19 member countries plus the president of the European Union.|
The significance of this meeting lies in the fact that the financial crisis is one of global proportion, and the problems wont be solved without an international cooperative effort. Because the G-20 countries represent such a large percentage of world productivity and trade it is imperative that there is basic agreement on how to combat the problems at hand. The first 2 days of the meeting, although met with large crowds of protesters outside their doors, were surprisingly fruitful in terms of agreement on several basic points. Cooperation at this global level is key, in my opinion, to setting us back on track for future growth and prosperity.
The group agreed to shore up the International Monetary Fund (IMF) and the World Bank with total further contributions of up to $1 trillion. The IMF was set up after World War II with the intent to stabilize foreign exchange rates by aiding developing countries in establishing monetary policy, developing trade, and by providing financing to governmental projects to improve economic conditions. Developing nations have been hardest hit during this crisis, and this move by the G-20 to further finance the IMF will help to stem further deterioration in those economies similar to the intent of stimulus packages established in most of the G-20 nations.
Most importantly, the group also agreed to revamp and reinforce regulation of the global markets and of the market participants. We have seen numerous accounts in recent months of bad regulation and lax enforcement of existing regulation. The much publicized antics of Bernard Madoff of New York and Allen Stanford of Texas, as well as the unbridled risk taking by AIG, are sufficient evidence that someone was asleep at the regulatory wheel here in the US. These characteristics of the regulatory climate are not unique to the US. The G-20 has determined to take a strong stand against tax havens where many of the more risky hedge funds or investment managers have taken residence with the objectives of secrecy and less regulatory scrutiny.
Back at home, we are still grappling with falling real estate values and record unemployment levels. While it may be tempting to look at the very low mortgage interest rates coupled with the large drop in real estate values as a buying opportunity, some professionals still wave the flag of caution. Even today, prices overall have only reverted to levels seen in late 2003. Yet by that stage the bubble was already well inflated. Expectations are that a crash of this scale will retrace its steps much further. To find pre-bubble prices you have to go back to about 2000 when values overall were about a third lower than they are even today. (See graph below) Therefore, the key to when to buy may be more closely related to the unemployment picture and income. Affordability will be more important than availability going forward.
On Thursday April 2nd first time unemployment claims hit 669,000 making it the 10th straight weekly increase in a row. The national unemployment rate has hit 8.5%, the largest number since 1983. If you accept as I do that housing and home values are directly correlated to personal income, then a poor employment environment translates to a poor real estate market. However, regarding affordability, it may be an ideal time for refinancing an existing mortgage. The Make Home Affordable initiative by the Obama administration has altered the landscape for many in terms of restructuring their debt. Simultaneously, the Fed continues its easy money policy which has brought down mortgage lending rates to the lowest levels in 50 years.
Overall, there are some positive signs on the horizon. The stock market has recovered some of its losses over the last several weeks. Retail sales have slowed their decline and housing prices have stabilized in some markets (not yet in California, Arizona, Florida, where the bubble was even greater than in the country as a whole). Personal savings of US households has risen over the last three months for the first time since 1998, a trend which needs to continue if we are to avoid future shocks regarding credit and debt. Because the global employment picture and productivity as well as the safety and security of the markets are the keys to recovery, there is a good chance that the efforts of global financial leaders through the G-20 conference and beyond will offer the next steps toward resolving the crisis.
©Patrick J. Catania 2009
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