It is not just that the world’s second largest economy, that of Japan shrank by 3.3 percent in the last quarter of 2008 but that on an annualized basis Japan’s economic growth has actually collapsed by a staggering 12.7 percent. This is a further stark indication of the depth of trouble in which the global economy finds itself.
Governments continue to thrash around looking for ways to stem the general collapse of confidence in the financial system. The G-7’s meeting in Italy on Saturday produced pious promises that countries would not resort to protectionism but the lack of confidence extends even to these assurances. Had not France’s President Nicolas Sarkozy said just before the meeting that he would bail out carmakers Renault and Peugeot with loans, provided they promised not to shed jobs in France, but instead considered their factories elsewhere in the world? Such a proposal is not only naked protectionism but also flies straight into the face of EU’s single market regulations. In among the rising tide of vitriolic recriminations, most of it currently directed against despised bankers, an interesting idea has emerged in the United States. It is that part of the massive bailout of existing banks be directed instead to capitalizing a brand new bank with a clean balance sheet, which would be able to restart the flow of the corporate credit, the dearth of which is putting even well-run companies in jeopardy. The argument runs that it is still impossible to put a figure on the black holes at the heart of the current financial system. Until the economy recovers, such a calculation will be possible. But with a new bank unexposed to these toxic assets, the normal business of prudential banking could resume.
It is pointed out that the Federal Reserve has already created a “wholesale” bank, one that deals directly with other banks and large corporates by buying up selected tranches of their debt instruments, and so injecting liquidity into the system. Also mooted is the creation of “bad debt banks” to which would be transferred distressed assets, thus freeing bank balance sheets of heavy liabilities and reducing their need to recapitalize to stay somewhere close to the Basel rules on capital adequacy, which are currently being widely honored in the breach in developed economies. The mechanism worked reasonably well in Eastern Europe in the 1990s when state banks due to be privatized, escaped from mountains of bad debt to state companies that they had been ordered to assume by the old communist governments.
The problem with starting afresh with shiny new banks is that they would face the problem of making a living with rock bottom interest rates. Given that any borrowers, be they corporate or individuals, however good, are suffering from reduced or endangered earnings in the downturn, new credits would be high risk and could only be reflected, therefore, in higher upfront fees rather than interest. Fascinatingly, such a business model reflects the growth area of Shariah-compliant Islamic finance. Does Wall Street, therefore, have some lessons to learn from the Islamic banking community?
Afghanistan war: West’s problems
AS with Iraq, to present the problem in Afghanistan just as one of whether to stay or leave is distorting, it is the manner of staying or leaving, indeed of both, which matters, said The Guardian in an editorial yesterday. Excerpts:
It is too early to say that Afghanistan has been a failure, but not too early to say that it has not been a success. The government of Hamid Karzai is corrupt, muddled, and weak. It is losing authority both in the Pashtun regions of the country, where most of the armed opposition to the Kabul authorities and the coalition forces is to be found, and in the still relatively peaceful non-Pashtun areas.
Drugs drive the economy, not the agricultural and industrial projects which donors agreed to fund in the confident days after the Taleban were overthrown in 2001. Most contingents lurk in uncontested parts of the country, allowing their governments to demonstrate support for the United States without paying any real price, either in casualties or cash. The tactics employed by American forces, and depended upon by most of their NATO allies, are open to moral question, particularly the use of an air arm that too often seems unable to distinguish between insurgents gathering for an attack and ordinary people gathering for a wedding.
To make matters worse, the crisis has expanded across frontiers. It is no longer just a question of Al-Qaeda and the Taleban finding sanctuary in Pakistani territory, but of the erosion of Islamabad’s control of the tribal areas and the possible defeat, or at least the retreat, of Pakistani armed forces in their own country. The geopolitical context has also changed. Attacks on American supply lines through Pakistan make routes through Central Asia more important just at the moment when Russia has squeezed the Americans out of their base in Kyrgyzstan. A gracious announcement by Russia, that US supplies will be able to move through Russian territory if the relationship between Moscow and the NATO countries improves carries more than a hint of veto.
