Former IMF economist warns of global recession
Simon Johnson, the former chief economist of the International Monetary Fund, warned of a global recession as a result of the devastating financial crisis that has struck the US and Europe.business Updated: Oct 04, 2008 15:29 IST
Simon Johnson, the former chief economist of the International Monetary Fund, warned of a global recession as a result of the devastating financial crisis that has struck the United States and Europe.
Johnson said the $700-billion rescue package passed by the US Congress and signed by President George W. Bush Friday was only a "stop-gap measure" that would not prevent a serious contraction of the world's largest economy.
"The US is clearly heading into, at best, a fairly severe recession," said Johnson, who left the IMF earlier this year and is now a senior fellow at the Peterson Institute for International Economics, a Washington-based think tank.
Johnson said he expected "a recession, not a depression" at the global level, adding that international action was "tremendously important" to restore confidence in credit markets. Banks have severely cut lending to each other and to consumers out of fear for
their own capital positions.
"At this moment, it is absolutely about a crisis of confidence. But the good news is you can end a crisis of confidence quite quickly," Johnson said.
He said the international community could start with a strong statement during meetings next week of the Group of Seven (G7) industrial nations and IMF members in Washington, and criticized some of the "finger-pointing" by European nations over a mess created by Wall Street.
"There's plenty of time for recrimination later, but right now we have to act quickly," said Johnson.
The US rescue package, which allows the government to buy up to $700 billion in damaged mortgage assets that have decimated the balance sheets of financial institutions, was a "positive step" in stabilizing the banking system.
"They really understand that the situation in the US today is serious and needs to be addressed," he said.
But Johnson said much more had to be done in the coming weeks and months to address the housing crisis at the centre of the turmoil, as well as to recapitalize banks in both the US and Europe.
"For $700 billion you get a band-aid but you don't get a solution," Johnson said. "Congress is way behind the curve. They need to have hearings, they need to have alternatives."
For starters, the US had to begin helping homeowners restructure their mortgages "much more aggressively" in order to arrest a "death spiral" of plunging home prices and record foreclosures in the housing market.
Johnson also called for a second fiscal stimulus package in the US to boost spending and help ease the economic downturn. A first set of tax rebates was handed out by the government in the first half of the year.
For Europe, where some countries are already facing a contraction of their economies, Johnson called on the European Central Bank to sharply reduce interest rates in order to improve lending conditions in their economies.
He also pushed for the European Union to harmonize its level of guarantees for bank deposits. The US rescue package boosted bank savings guarantees from $100,000 to $250,000.
Britain and Greece also raised their deposit guarantees Friday, while Ireland this week offered blanket coverage for all savings held in the country's six main banks - a move the European Commission said distorted competition.
"Within the European Union, there's clearly a need for more coordination," Johnson said.