Published: Monday September 13, 2008
Economist and former Central Bank governor Winston Dookeran, said yesterday that the next development to emerge in the global financial crisis would be a “contraction of world output.”
Dookeran was addressing a Congress of the People forum at the ASJA Boys College in San Fernando. He said the next dynamic to be seen would be “a lowering of world inflation (deflation); a realignment of currency values in search of regaining competitiveness; a contraction of world output and a continuing loss of global wealth.”
Dookeran, political leader of the Congress of the People (COP) added, “The use of monetary policy to regain confidence is now neutralised —as evidenced by the little impact of the coordinated reduction in bank rates by the world’s major central banks.”
He said that strategies for economies would shift focus from “development issues—poverty, equity and structural change—to stability issues like regulation, bank capitalisation and adjustments to interest and exchange rates re-alignment.”
The former minister in the National Alliance for Reconstruction (NAR) government said that a new world dynamic had set in and the assumptions of economic logic as we know them were being tested. But he said the real question was, “Will this change the political logic facing us? The solution lies in politics much more than in economics.”
Explaining the present global crisis, he said it began as a “debt and default” transaction, derived from a political mandate during the Clinton presidency to provide homes to all via sub-prime lending.
“Lax regulatory compliance in the Bush term allowed the expansion of the debt bonds for which there was insufficient asset backing.
He said this translated into a credit crunch.
The next thing that happened was the insolvency of the large financial institutions, including triple A firms which were labelled “too big to fail.”
Dookeran said the issue of confidence then arose, and stock markets responded by using up their wealth (loss of value of shares) to pay for the deficits in the economic system, with the expectation that this would bridge the turbulence during the “lag” time required for the public injection of funds to work its way into unlocking the flow of credit.
Dookeran said, “Stock prices in the real estate sector followed the price movements in the financial sector on the emerging sentiments that a US and global recession was near. A few significant countries admitted that they were in recession, driving a psychology of fear into the market, making this, not only a credit crisis, but also a market crisis.”
Source: Trinidad Guardian Newspapers
http://www.guardian.co.tt/business1.html
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