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From the financial crisis to the economic downturn
Restoring growth is a key challenge
Angel Gurría
Secretary-General of the OECD
The financial crisis sweeping world markets is the worst since the Great Depression.
While the crisis is biting into the real economy, hard lessons are being learned. How
should policymakers move forward, particularly as room for manoeuvre is being
squeezed?
The size and duration of the crisis remain uncertain, but the cost is immense, in
subprime losses, wiped-out stocks, rescue packages and more.
The OECD has from the outset welcomed the systemic rescue plans in the US and
Europe. By injecting liquidity, providing guarantees, dealing with troubled assets and
recapitalising the banking system, these actions should help relaunch bank lending and
get the economy going again.
We have seen boom and bust cycles before, but these are exceptional circumstances.
This time the financial system–the conveyor belt through which the economy works–
has been blocked. Governments had no choice but to take action.
We have welcomed the strong leadership shown by several countries which has helped
restore the functioning of the markets. We must now tackle the underlying causes.
Moreover, as markets remain volatile, the crisis has placed serious doubt in people’s
minds about the reliability of their banks and financial services and indeed, about the
credibility of the market system itself. How can governments restore confidence and get
the markets back on their feet?
Understanding causalities is a pre-condition for good policymaking, since bubbles and
crises will occur again if the sources are not addressed directly. There is wide agreement
that markets need more effective monitoring and regulation, and stronger corporate
governance. After all, from Wall Street to Main Street and across world financial
centres, the market’s invisible hand had gone astray. Excessive lending at cheap interest
rates fed an insatiable demand for high-risk financial products, backed by flawed
approvals from rating agencies. An already complex market became unreadable. What
eventually transpired while asset prices dropped was a market excessively loaded with
so-called “toxic” debt.
The reaction was sudden, and the deleveraging brutal, but while the crisis itself was not
forecast, no-one can say it came completely out of the blue. Over the past year some
OECD members expressed concerns about lightly regulated, highly-leveraged financial
products, and several months ago we wrote about the gaps in regulatory and accounting
standards, and highlighted failures in corporate governance.
True, there may have been ignorance about the amount of debt outstanding and who
was exposed, but clearly the regulatory structure was simply unable to deal with the
likes of mortgage-based securities, derivatives and credit-default swaps.
Now, we must ensure that the rescue packages work, so that lending resumes and
payments systems are secured. For this, markets must recover some normality, while
avoiding excessive volatility.
We must also think about the long term, and OECD is working alongside governments,
central banks and international institutions in advancing the reforms in regulatory and
accounting standards, lending practices and corporate governance needed to address the
crisis. We should also respond to the call of political leaders to rethink the global
economic governance infrastructure, in order to increase its effectiveness and
legitimacy.
Overall, a more holistic culture of risk management, compensation issues and
responsible, ethical and accountable management must be forged, grounded in better
regulatory structures and stronger implementation of agreed standards, such as the
OECD Principles of Corporate Governance, as well as improved financial education and
risk awareness among all users of financial markets. Other policies too must be
improved, not just concerning banking, but also related to housing, for instance, so that
low-income families are not unfairly exposed to risky mortgages.
After all, what really matters is the economic welfare of people, their homes, businesses
and jobs. The ultimate goal of our actions is to avoid a wide, protracted global economic
downturn, restore the conditions for growth and ensure this crisis cannot be repeated.
Already before the crisis, OECD had forecast a slowdown in some countries, and now
the outlook seems dimmer as we prepare our next OECD Economic Outlook for late
November. It is as yet unclear to what extent government intervention will affect budget
deficits and aggregate demand, but clearly sound fiscal management will be needed.
Also, the degree to which lower inflation will allow for a more accommodating
monetary policy remains uncertain.
Policy measures to restore economic growth are therefore essential. We should look at
the underlying trends and policy levers that will allow a new era of increased
productivity and growth. But to do so, we also need to deal with issues such as
competition, education, and the required reforms. Social measures will also have to be
reinforced to address the expected rise in unemployment. And we must not neglect
other challenges either, such as meeting development aid targets and tackling climate
change.
These exceptional circumstances may reshape priorities and policy frameworks in
several OECD countries. The crisis casts a shadow, but there is a bright side, as lower
commodity prices create precious wiggle room for policy, and robust emerging
economies inject some balance to the world economy.
The market system is in crisis, and governments are in the driver’s seat. Our leaders
must solve the financial crisis together. As a hub for dialogue on global challenges, our
new, more plural and relevant OECD is helping to chart the way forward. Times are
uncertain, but our commitment will not be found wanting.
©OECD Observer No 269 October 2008
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• For other articles by Angel Gurría, click here
• See also www.oecd.org/secretarygeneral
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