Poorer countries ‘need bailout help too’

Some of the people worst affected by the current economic crisis are those living in the developing world, the World Bank’s managing director has said. Developing world economies have been hit hard by the collapse of export markets, falling remittances and a widespread lack of bank credit, Ngozi Okonjo-Iweala told a BBC World Service debate on the aftermath of the collapse of Lehman Brothers. Furthermore, such countries cannot afford the kind of government stimulus packages that are boosting economies in the West, she said. “There are countries that have no fiscal space for stimulus,” she says. “Low income countries need to be talked about and have the developed countries help them.” Her comments underline another lesson from the collapse of Lehman Brothers, that the economy is now truly global. No one escaped the impact. InfluentialBut to some extent there have been winners and losers. On the winners side, China’s swift measures to limit the impact have allowed it’s growth to continue to roar ahead, bringing in its wake a greater influence in the political debate. “The fact is that the standing, the influence of the United States will be greatly diminished by this crisis,” says Nobel prize-winning economist Joseph Stiglitz. “Its ability to say that it knows how to run an economy is obviously going to be questioned.” Professor Robert Shiller from Yale University says he saw the current crisis coming back in 2005. Unfortunately, at the time, nobody listened. Now he admits he could have been more outspoken, but he too got swept away in the enthusiasm of the boom. “The human species is empathetic,” he says. “We see other people getting excited, and we get excited too. We self-censor ourselves. We don’t want to spoil the party.” The lesson: economic bubbles are the result of behaviour that is hardwired into the way we are built. In other words, there will be more. “[A] crisis will happen again,” says former Federal Reserve chairman Alan Greenspan, “but it’ll be different. They are all different. “But they have one fundamental source, and that is the unquenchable capability of human beings, when confronted with long periods of prosperity to presume that it will continue. And they begin to take speculative excesses.” Crisis managementSo how do we learn to live with a world of recurring crises? The first thing is to minimise their ferocity says Prof Shiller. “At the G20 meeting, the big concept seems to be executive salaries,” he added. “That’s a politically popular movement. But it’s not central to making the system work better. There’s a lot of boring stuff that has to be done.” Better and more joined up regulation, he thinks, would stop bubbles developing at a much earlier stage. It’s something that Wall Street insiders have long known. There are already plenty of regulators. For Lawrence McDonald, formerly a trading Vice President at Lehman Brothers, there are too many and they are too un-coordinated. Questions raisedHe also highlights other lessons from the current crisis: the sheer difficulty of managing banks with such massive and complex liabilities, the lack of understanding among bank bosses about the risks their staff were taking and, of course, the bonuses. “I have some advice for the G20,” he says. “Let’s take some of the TARP (bailout) money… let’s give bonuses to the people at the SEC (the financial regulator)… Two million dollar bonuses, if they uncover the next Bernie Madoff.” So, in future we’ll be dealing with a multi-polar world in which further crises cannot be ruled out - they can only be better managed. And that’s assuming the current crisis is actually over. “This thing could turn ugly again,” cautions Prof Shiller. “We have to be ready to give more stimulus.” Even if it doesn’t come to that, economists and politicians need to think hard about the role that banks will play in future around the globe. “The important thing,” says Prof Shiller, “is to make finance serve the people. That has to be the emphasis.” BBC