12 November 2008

All attention will focus on the Economic Crisis Summit in Washington come this Saturday, 15 November 2008. A meeting of world leaders from the Group of 20 industrial and emerging countries to be hosted by President George W. Bush of the United States to discuss the financial crisis. The meeting will also include central bankers and international finance officials.

A major goal of this Summit will be to prevent any repeat of the irresponsible risk taking that led to the worst erosion of credit since the Great Depression.

It is expected to review the progress being made to address the current financial crisis and argue on a common set of principles for reforms of the regulatory and institutional regime for the world's financial sectors. These reforms would cover areas like increasing the transparency of markets, revising the rules that govern the flow of investment around the world and improving the oversight of banks, rating agencies and hedge funds.

It will be very interesting to see how the leaders do the balancing act between free markets and regulations. The US and Canadian support for free markets will be pitted against the European demands for greater state control.

In the middle will be the developing or emerging countries that hold increasing sway over the future of the global economy and do not want the trade-off between regulation and economic expansion to come out at their expense.

The hard part will be how much growth they are willing to sacrifice in return for greater economic security. Whatever changes are made will be long standing and so policy makers must be careful to make sure they are a net positive overall.

The Group of 20 had already emphasize on the need for governments around the world to use monetary and fiscal policy to support expansion, including new spending and lower interest rates.

Governments are gearing up fiscal stimulus packages and loosening monetary policy. Increasing higher government spending on roads, airports and other infrastructure, tax deduction for exporters and bigger subsidies to the poor and farmers. All on the conviction that timely policy stimulus will support domestic demand and boost economic recovery quickly once the global financial credit crisis subside.

However, fiscal stimulus alone is not enough to keep economic growth going. It is just like jump-starting a car. Corporate investment and bank lending are the fuel necessary to keep it going. But they are not forthcoming.

Let us hope that the outcome of the Economic Crisis Summit will crack the tough nut that will draw down the resistance for the required response from corporate investment and bank lending towards the stimulus packages that are being churn out by the various governments around the globe.