What the Experts Say

Author; Editor, Newsweek International; and host of the international affairs program, Fareed Zakaria GPS on CNN

Zakaria argued that the current economic crisis is a product of success rather than failure. He described himself as an optimist in the current global economic crisis and noted that the speed and scale of the response by governments has been striking. He contended that policy makers are aggressively attacking the economic crisis because the cost of over-reacting could be much less than the cost of under-reacting. His optimism about the global situation is attributable to his belief that the American economy is incredibly resourceful. For example, the U.S. has labor mobility while Europe and Japan do not have enough workers. He acknowledged risks to his thesis, chief among them that the U.S. may not be able to make difficult political decisions to reduce government spending and tighten monetary policy when the crisis is over. Politicians seem to have lost the ability to inflict short-term pain for longer term gain. Zakaria emphasized the need for global cooperation in a world where the global economy is so complex and fast moving that nobody fully understands it.

Professor of European Political Economy, European Institute, London School of Economics and Political Science

Buiter’s focus was on the future of capitalism. Before the current crisis erupted nothing of this magnitude had been imagined. There have been dozens of financial crises in both the 20th and 21st centuries, which are not uncommon within a capitalist-based economy. Financial crises are protracted affairs, with asset market collapses becoming deep and prolonged, coupled with profound declines in output and employment and rapid increases in government debt. Today’s industrial country financial crisis has all the symptoms of the emerging market (EM) crises of the last few decades, but the main differences are the U.S. currency’s reserve status and the size and global contamination of the crisis. Buiter argued that the contraction will last at least until the end of 2010 to early 2011, which will be followed by a bout of inflation in the U.S. and possibly U.K., but not likely in Euroland. Growth will return to the advanced industrial countries and in EM, but will be slower than during the years 1999-2007.

Formerly Australia’s Treasurer and Deputy Leader of the Liberal Party

Costello addressed how global policy makers view the current crisis and provided a recommendation for the appropriate response: uniform, international regulations to be implemented and enforced by a single national regulator within each country. Costello dismissed the idea of the International Monetary Fund (IMF) or another international body becoming an effective global regulator of financial markets. He argued that the IMF is ill-equipped to prevent financial crises due to inadequate funding; insufficient knowledge of local financial markets; and unwillingness by many countries to cede authority to the IMF. As for dealing with future asset bubbles, he dismissed the idea that central banks must take responsibility. He stressed that finance ministries have more levers to unwind asset bubbles in an orderly way, particularly by using taxes in coordination with the central bank. Costello warned against over-regulation and voiced concern that the level of global fiscal stimulus would lead to higher taxes and inflation, increased currency volatility and redistribution of economic power from the developed nations to emerging market nations, particularly China.

Former Economic Advisor, Head of Monetary and Economic Department at Bank for International Settlements

White presented two major themes in his argument that the global financial crisis will not be resolved until well after PIMCO’s secular horizon has past. First, he argued that we have seen this all before in terms of the causes and implications of the crisis. Second, he maintained that we have endured a solvency crisis, as opposed to a liquidity crisis. The implication is that structural damage to the system has been much deeper than most believe. White stressed that avoiding another bubble will require coordinated and pre-emptive monetary and fiscal policy. He also suggested that a global organization focused solely on systemic risk is necessary to prevent future crises.