Economic Management: Past, Present and Future

• Author: Omar Davies
• Pages: 74-84

7

ECONOMIC MANAGEMENT:

PAST, PRESENT AND FUTURE

Omar Davies

With regard to the def‌iciency in analysis,

many sought initially to suggest that the root

of the crisis was in the US housing market,

resulting from what has been termed the sub-

prime” phenomenon. (The term “sub-prime”

is a euphemism for the fact that millions of

home buyers had been granted mortgages

signif‌icantly above what any basic risk analysis

would have justif‌ied). It was only after the f‌irst

round of “shocks” that more probing questions

began to be posed about def‌iciencies in the real

economy.

Fischer1 listed seven factors which he

identif‌ied as the main contributors to the

crisis in the f‌inancial markets: (i) failures

of regulation, particularly in the United

States; (ii) the proliferation of “sophisticated”

derivative-based f‌inancial instruments, the

risk characteristics of which were not fully

understood; (iii) the housing price “bubble”

in the United States, to which the f‌irst two

named factors contributed; (iv) inadequate

risk management within f‌inancial institutions;

(v) inappropriate methods of compensation

in f‌inancial institutions which contributed to

excessive risk-taking; (vi) overly expansionary

monetary policy – particularly in the United

States – over the 2003–2006 period; and (vii)

international imbalances which helped to

generate the problem.

There will be no attempt in this

presentation to explore all the factors listed

by Fischer. However, from our vantage point,

any post mortem of the crisis must include a

careful assessment of how regulators in all areas

Introduction

The crisis affecting the global economy has

clearly demonstrated at least three clear facts

worthy of note. The f‌irst is that there are very

few, if any, who can claim to have predicted the

depth and widespread nature of the economic

downturn which is now affecting virtually

every country in the world. The second is that

the full extent of the interdependence of the

national economies of the world has never

before been so emphatically demonstrated,

resulting, to a large extent, from the dominance

of the United States, particularly in f‌inancial

markets.

The third factor is that in the face of the

crisis, pragmatic policy responses have quickly

replaced ideological dogmatism. In many

instances, these responses have been ones which

off‌icials of the developed market economies

and the multilateral f‌inancial institutions have

consistently warned developing countries to

avoid. In particular, the use of def‌icit f‌inancing,

by the developed countries, to support

“stimulus packages” has won endorsement

from the IMF, which traditionally has

cautioned borrowing countries against such

approaches. However, additionally, in many

instances, the responses do not seem to have

been subjected to rigorous analysis prior to

being implemented. The result is that there

have been changes to policies involving

signif‌icant expenditure within a short time

period after an initial announcement.