How to restore faith in a failed economic system

October 26th, 2008 - 2:47 pm ICT by IANS  

Brussels, Oct 26 (DPA) The trouble with telling nervous customers you have solved their problem is that you first have to admit there is one. That is the dilemma facing the world’s banks, governments and financial institutions as they desperately try to restore faith in an economic system which millions of customers now believe has failed.”We have shown the world that the United States of America will stabilise our financial markets and maintain a leading role in the global economy,” US President George W. Bush proclaimed on Oct 3 after the US Congress passed a $700-billion bank rescue plan.

His words spectacularly failed to restore global confidence, with stock markets nosediving in the days following the vote.

Europe, meanwhile, has “taken too much time to look at confidence - we’ve ignored it too long”, Hans Redecker of the BNP Paribas bank said in London.

The word “confidence” has become a watchword for world leaders since the current financial crisis began in early September.

Analysts around the world have highlighted the lack of trust as a key reason for the global slowdown, with banks unwilling to lend to one another, and customers of banks such as Britain’s Northern Rock desperate to take their money out before the institution collapsed.

European leaders have backed up that analysis with action, offering trillions of dollars in guarantees of deposits and inter-bank loans in a bid to keep their populations from panic.

Their moves “seem to have helped, but they seem to have almost reached the maximum (governments) could have done, barring full nationalisation”, Karel Lannoo, head of the Centre for European Policy Studies in Brussels, said.

The psychological pressure has been particularly acute in Germany, where memories of the rocketing inflation and financial crashes of the 1920s and 1930s are burned deep in the national psyche.

“I wondered what would happen if queues formed outside German credit institutions as they did for Northern Rock. The traumatic events of the twentieth century (have) imprinted themselves far more deeply in this country than in others,” German Foreign Minister Peer Steinbrueck told the Die Zeit weekly Oct 16.

But governments and banks alike have struggled to overcome a counter-current of market uncertainty which has read their guarantees as a sign that things are even more serious than had been feared.

German banks, for example, reported a flood of anguished enquiries the day after Chancellor Angela Merkel announced a blanket state guarantee for retail bank deposits, as though the guarantee had confirmed the scale of the problem rather than solving it.

That leaves governments needing to do nothing less than rebuild the financial system if they are to restore confidence, analysts say.

“As mistrust in the financial system has spread to ordinary citizens, a broad institutional and regulatory plan needs to be put in place to convince them that policy-makers have learned the necessary lessons from this crisis,” Lannoo wrote in a briefing paper Tuesday.

But while governments have been quick to offer national bail-out plans and a European-level “tool box” for future interventions, analysts say they have not done nearly enough on the global scale.

“What we see is a response with very little coordination. The international cooperation is still missing,” Redecker said.

World leaders have recently lined up behind a call from French President Nicolas Sarkozy for an emergency summit to “re-lay the foundations of responsible capitalism” on Nov 15.

But such a response, negotiated between the world’s most powerful and self-assertive countries at a time of massive domestic stress, is likely to take a great deal of time.

“It will take an extremely long-term effort: to restore a lost reputation takes a lot of time,” Lannoo pointed out.

And with Europe’s markets and citizens already spooked by talk of a looming recession, further bank bail-outs, slumping industrial profits and financial turbulence in key export countries such as the US and Russia, time is the commodity they can least of all afford.

“Our view since March has been that the solution would be to stabilise the banking sector, but the measures which were introduced came very late. The question now is, was it too late?” Redecker said.

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