Treasury Secretary Timothy Geithner and Lawrence Summers, director of the White House National Economic Council, are urging leaders from the Group of 20 nations to keep the economy growing by avoiding significant budget cuts. “We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth. Without growth now, deficits will rise further,” the officials wrote in a Wall Street Journal opinion piece.
The op-ed piece defines the struggle central banks and governments face in the current environment between providing sufficient liquidity for the economic recovery with banks and corporations still reeling from the credit crisis and maintaining fiscal responsibility so that the cost of issuing debt does not skyrocket and begin bankrupting whole countries. Europe is worried more about the latter issue than the former. Does anyone believe that the current political and central bank leaders have the competence to walk this tightrope without making severe policy mistakes?
The Treasury Department released the text of the piece as follows:
Our Agenda for the G-20
By Timothy Geithner and Lawrence Summers
This week, President Obama will travel to Toronto for the G-20 Summit. Engagement with the G-20 has been a key component of the administration’s strategy to defuse the global financial crisis and ensure economic recovery. Stronger growth with solid job creation here in the U.S. depends on an expanding global economy, and this year’s G-20 provides an important opportunity to focus on the policies required to reinforce growth.
In London last spring, the G-20 embraced an unprecedented and coordinated strategy to end this crisis. In Pittsburgh last fall, we established a new framework for global growth, and we designated the G-20 as the premier forum for international economic cooperation. In Toronto, we will take steps to ensure that the current recovery is self-sustaining.
Thanks to strong, decisive and coordinated action, President Obama and the other G-20 leaders have achieved significant progress since the London meeting. The global economy, which was then contracting at an unprecedented rate, is now expanding, and world trade has increased by more than 20% over the last 15 months.
This turnaround has been especially dramatic in the United States. At the time of the London summit, the U.S. economy was shrinking at an annual rate of 6%. Now it is growing at a rate in excess of 3%–the largest swing in U.S. growth in 50 years.
At the start of last year, the U.S. was losing more than 700,000 jobs a month, and today the private sector is generating new jobs. Recovery was only possible because we took action to repair our financial system, driving down borrowing costs for homeowners, consumers and businesses, and put in place the Recovery Act, which increased demand by cutting taxes for families, helping unemployed workers, and investing in public infrastructure.
We still face enormous challenges. To maintain the momentum of the U.S. recovery, we need strong, balanced and sustainable global growth. Global growth will help double U.S. exports over the next five years, supporting several million American jobs, a key goal of the president’s export initiative. The G-20 is critical to ensuring that global growth, and three priorities must be at the center of our agenda in Toronto.
First, the G-20 must continue to work together to secure the global recovery it did so much to bring about. We must ensure that global demand is both strong and balanced. While the U.S. was the major source of demand for the world economic growth before the crisis, global demand must rest on many pillars going forward. That is why the G-20 must support Europe’s reform program and the financing that Europe and the IMF will provide to countries facing acute fiscal challenges. There is a broad consensus about the importance of fiscal sustainability, but the precise timing and sequencing of that consolidation should vary across countries and be calibrated to maintain the momentum of private sector recovery.
Countries must put in place credible plans to stabilize debt-to-GDP levels and set a pace of consolidation that reinforces the momentum of growth. We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth. Without growth now, deficits will rise further and undermine future growth.
Emerging economies can help strengthen the global recovery by strengthening domestic sources of growth and by allowing more flexibility in their exchange rates. We welcome China’s recent decision to do so and look forward to its vigorous implementation.
Second, we need to accelerate efforts to establish a global framework for financial regulation. Here at home, we are on the verge of completing the most sweeping financial reform in more than 70 years. This reform will curb excessive risk-taking, reduce leverage, reform compensation, protect consumers, bring transparency and more competition to derivatives markets, address the problem of firms that are too big to fail, and make sure taxpayers do not bear the costs when firms do fail.
The world should welcome Europe’s announcement to bring greater disclosure to its banking system, which provides further momentum for the G-20 work to bring all global institutions and markets within a more transparent regulatory system. Critically, we need to reach agreement internationally on reducing leverage and raising capital requirements, improving both the quantity and quality of capital. While new measures must be phased in over time so as not to interfere with the flow of credit, establishing those rules now can be an important source of certainty and confidence.
Third, we need to make progress on other global challenges that are essential to the future security and prosperity of the world. Alongside our efforts to lay a new foundation for economic growth, we must follow through on our common commitment to raise living standards across developing countries and to make smarter investments in areas like agricultural development and food security.
In addition, we must address the urgent challenge of our energy needs, as the current disaster in the Gulf makes clear. In Pittsburgh, the G-20 countries agreed to phase out inefficient fossil fuel subsidies over time. The U.S. has laid out how it intends to achieve this goal, and we urge other G-20 countries to demonstrate their commitment to this critical objective by detailing how and when they plan to eliminate policies that encourage the overconsumption of fossil fuels.
In this new era, when emerging markets account for two-thirds of global growth, concerted action by the G-20 is the only effective way to confront the challenges that lie ahead. As world leaders arrive in Toronto, we must renew the sense of common purpose and collective urgency that has served the world so well over the past year and a half.
Gregg D. Killoren
victoria1014
Faltering Recovery Not Uncommon After Severe Financial Shock
One of the favorite arguments of stock market cheerleaders is that post-recession “double dips” or significant lapses in economic recovery are the norm. This is true of most expansions following recession in the United States in the post-World War II era. However, the recent recession, which began in December 2007 and may yet be ongoing, was caused by a financial crisis. Thus, the post-recession period of recovery cannot be compared to ordinary U.S. recessions.
In their latest paper, Carmen M Reinhart, Professor of Economics, University of Maryland; former VP at Bear Stearns, and former Deputy Director at IMF Research Department, and Vincent Reinhart, Resident Scholar at the American Enterprise Institute, find that “economic growth is notably slower in the decade following a macroeconomic disruption.” The post-crisis years often include several “double dips” and other aftershocks. Of the 15 post-World War II crisis episodes examined by the authors, nearly one half of these (seven episodes) involved a broadly-defined “double dip.”
Many times, a recovery economy falters because of some exogenous event. Because most post-crisis economies have characteristics of high debt and leverage, they are more vulnerable to negative external events. In other words, an economy damaged by a financial crisis is more susceptible to bad luck. Luck has more to do with life in general than many of us are willing to admit.
None of this is meant to assert that the U.S. is or is not on the verge of a double dip. Certainly, many economic indicators are pointing to a slowdown in economic activity, but not an outright recession. Still, investors need to keep in mind that our situation is precarious, and any negative external event could send a shock through markets at any time.
Read the full article on the Reinharts’ research at Voxeu.org: Diminished expectations, double dips and external shocks: The decade after the fall.
→ 1 Comment
Posted in Credit Crisis, Economy, Investing, Market Commentary, Personal Finance
Tagged Credit Crisis, Economy, Financial Crisis, Investing, Market Commentary