Global Financial Meltdown:Perspective Of A Leading African Economist
Dr.Obadiah Mailafia is a distinguished African economist. Currently he is the Chairman of the Center for Policy and Economic Research (CEPER), in Abuja, Nigeria. Dr. Mailafia has had a distinguished career in government, academia and international development. He has been a university academic, international banker and a senior government official. He was until recently Deputy Governor of the Central Bank of Nigeria and a Senior Advisor to the President of Nigeria (with rank of Minister of State). He was also for several years an official of the African Development Bank Group. He is by training an economist and policy scientist, with research interests in monetary economics, international finance, and strategic management and development administration. On December 16th, 2008. Dr. Mailafia delivered a speech on the current Global Economic Crisis for the Kaduna Chamber of Commerce in Nigeria. Though his talk dealt in part with the impact of the global meltdown on the Nigerian economy, Dr. Mailafia’s presentation provides an exceptionally cogent and lucid analysis of the ongoing global financial and economic turmoil. Below is an excerpt from the speech on the Global Economic Crisis, which Dr. Mailafia graciously provided permission for WWW.Global EconomicCrisis.com to publish on our blog.
Presentation on the Global Economic Crisis by Dr.Obadiah Mailafia:
From first principles, we must not forget that financial booms and busts are not a new phenomenon. What is disquieting about the current meltdown is that it is in the nature of a seismic tremor of earth-shaking proportions.
Within a few moths, some of the biggest financial giants have gone belly-up, while several more are in serious trouble. How indeed are the mighty fallen! Bear Stearns, AIG, Fannie Mae and Freddie Mac, Lehman Brothers and Merill Lynch. The automobile giants are virtually on their deathbeds while a good number of industrials are surviving only by the skin of their teeth. A rather prosperous central European nation, Iceland, has virtually sued for bankruptcy, resorting to an IMF standby arrangement – the first since the British ‘humiliation’ of 1967.
The contagion has spread to Europe, Japan, Asia, Africa and Latin America. An estimated US$1.7 trillion in bailout funds has already been committed by OECD countries, but we are yet to see the end of the tunnel, not to talk of any light in it. According to a recent report, the world stands in need of a staggering US$4 trillion to fully resolve this crisis.
Any explanation of the current financial turbulence must begin with the housing bubble fuelled by low interest rates, increased global liquidity and predatory lending by the financial giants. According to some estimates, the annual issuance of US sub-prime mortgage backed securities increased from a mere $56 billion in 2000 to a massive $508 billion in 2005, comprising something of the order of 20 percent of total US mortgages. By 2006, the housing bubble was beginning to unravel, as higher interest rates and rising oil and food prices – and a generalized decline in consumer confidence – were starting to take their toll.
For Robert Reich, former Labor Secretary under President Clinton, greed has to be the main explanatory variable. For billionaire investor George Soros, on the other hand, the main villain is former Fed Chairman Alan Greenspan whose monetary policies allegedly encouraged speculative exuberance even as interest rates were at an all-time low and asset prices were spiraling out of control. Predictably, President-elect Barack Obama puts most of the blame on the misguided policies of the Bush administration, describing the situation as “the most serious financial crisis since the Great Depression”. To all intents and purposes, the big ratings agencies must also bear some of the blame for failing to be more rigorous in their risk assessments. There Acare yet others who blame the situation on the repeal of the Glass-Steagall act 1933 which had made a clear demarcation between general commercial banking on the one hand, and investment banking activities, on the other. The absence of such a demarcation was underlined as one of the factors accounting for the speculative exuberance that led to the 1929 Wall Street crash.
Linked to this is the dwindling capacity of regulatory authorities. The reality is that the world of high finance has become so complex in our digital age, with capital travelling at the speed of light and several instruments engineered using the arcane language of quantum physics. The hedge funds, which control over a US$1 trillion in assets, are not subject to many of the traditional regulatory regimes. Inevitably, such power without responsibility is bound, sooner or later, to lead to anarchy or even worse.
Another factor that may not be so apparent is what I would term “the crisis of American hegemony”. It is an open secret that America is today the world’s number one debtor-nation. One of the greatest achievements of the Clinton Presidency was to have eliminated the budget deficit. When the Republicans took over, the notion of balanced budgets was thrown out of the window. It was further aggravated by military adventures in Afghanistan and Iraq that cost an astonishing US$1 billion daily in taxpayers’ money. And we all know that those adventures have more to do with advancing the interests of oil sharks and the military-industrial complex than about fighting terrorism or spreading the ideals of democratic government.
A hypothesis made famous by the late Harvard economist Charles Kindleberger and others posits that a stable international monetary is possible only where there is a world power able and willing to bear the burdens of responsibility for the preservation of the prevailing system. Such a leader must also be prepared to act as a lender of last resort. Britain played this role in the nineteenth century. America was to play this role for much of the twentieth century. For such theorists, the decline of a ‘hegemon’ is often reflected in international financial disequilibrium, a situation which perhaps offers part of the explanation for the current difficulties.
For America, it will not be the end of the world, but it certainly signals the end of en era. In over-extending herself beyond her means and her material capabilities, America has ended up alienating her allies, pursuing a unilateralist course that its wisest statesmen would never have dared to contemplate. In so doing, George W. Bush and his neoconservative brethren have exhausted the moral capital that the American Republic has accumulated for the better part of a century. More than at any time in her illustrious history, America stands isolated and bereft of moral authority…
I have to confess that I am not one of those who are easily taken in by the report attributed to Merrill Lynch, which declares our economy to be the safest in the world. As far as I know, our alleged safety derives from the paradox of marginality – to the simple fact that we are not deeply hooked into the global digital economy. It is foolhardy to behave like the proverbial ostrich when Rome is on fire and when the embers of financial contagion have been unleashed everywhere.
Madam President, talking about the much-vaunted Vision 2020, I am constrained to note that we are yet to see a clear economic strategy around which to anchor rational expectations and mobilize the vast resources and energies of our people. Our leaders have all but forgotten the onerous task of nation building. The simple truth is that we are not yet a nation and we are far from having that spiritual bond which the British political philosopher Sir Ernest Baker regarded as the most critical factor in the building of a united and prosperous democracy.
Clearly, we have enormous work to do and several steep mountains to climb. At the global level, we would need to work with others to hammer out a brave new world in which the demands of equity harmonize with the imperatives of international solidarity.
Distinguished Ladies and Gentlemen, for us in this benighted continent, the current upheaval provides an opportunity to re-launch the African Century and to consolidate the foundations of democracy that would enhance peaceful and just development for our long-suffering people. After a millennium of servitude, our continent may, at last, be coming to its own. No nation is better placed, in my view, than ours to champion this continental rejuvenation, whose foundations must be built on sound economic and public management. But I daresay that we will not rise to the occasion until we have transformed our national mindset, reformed the way we do business and changed the structure of our politics and the very spirit of our constitution, leadership and nationhood.