Calm down and go back to basics

The IMF had predicted in October that the world output would increase by 2.2% in 2009. Now the same IMF warns that World economic growth is set to fall to just 0.5% this year, its lowest rate since World War 2, and that the eurozone economy is poised to shrink by 2.0% in 2009 and the US economy by 1.6%. The IMF says financial markets remain under stress and the global economy has taken a sharp turn for the worse. "We now expect the global economy to come to a virtual halt," said IMF chief economist Olivier Blanchard in a statement.

The International Labour Organization is predicting that as many as 51 million jobs worldwide could be lost this year because of the global economic crisis.

Many had hoped that growth in developing nations would continue at a steady pace and help offset the recession in developed nations, but countries such as China are now struggling with a collapse in demand from their primary export markets, caused by seemingly endless crisis in the banking system.

According to IMF, growth in emerging and developing economies is expected to slow sharply, from 6.25% in 2008 to 3.25% in 2009, the main reasons for the drop being falling export demand, lower commodity prices and much tighter external financing constraints.

International co-operation is needed now to prepare new policies and initiatives, and for capital injections to support viable financial institutions. IMF says future co-ordinated financial policies should concentrate on recognising the scale of financial institutions' losses and on providing public support to those institutions that are viable.

Unfortunately the facts of the day do not predict high trust or respect now for the neo-liberal free-market fundamentalism and deregulation by economy- and financial "expert" individuals and institutions, especially in USA, which by many analysts is pointed out as the main and primary source of the current crisis, infested by financial speculations, fatal market-bubbles and other extremes of wild market behaviour, also well-known from many historical economic cycles.

Let's summarize here the basics of the present financial crisis.

Most analysts think the current credit crisis was caused by the sub-prime mortgage business, in which US banks gave high-risk loans to people with poor credit histories. These and other loans, bonds or assets were bundled into portfolios - or Collateralised Debt Obligations (CDOs) - and sold on to investors globally.

In the period between 2004 and 2006 US interest rates rose from 1% to 5.35%, and the US housing market began to suffer, with prices falling and a large number of homeowners defaulting on their mortgages. Falling house prices and rising interest rates lead to high numbers of people who cannot repay their mortgages. Default rates on sub-prime loans - high risk loans to clients with poor or no credit histories - rise to record levels.

Investors suffer losses, making them reluctant to take on more CDOs. Losses are felt by investment banks all over the world. Credit markets freeze as banks are reluctant to lend to each other, not knowing how many bad loans could be on other banks' books. Many governments move to nationalise some banks and to initiate coordinated emergency policies, state loans and other financial activities, but there seems to be no short term quick fix for the problem.

Economies around the world are affected by the credit crunch. A lack of credit to banks, companies and individuals lead to recession, job losses, bankruptcies, and a rise in living cost.

Some analysts agree with IMF that the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3%.

Now, thinking of the future and recovery, pessimism can be self-fulfilling. "What we all need to do is to sit down and calm down and go back to basics. And most important of all, shed our sense of pessimism", says David Tang, Hong Kong-born, English-educated entrepreneur who founded the clothing chain Shanghai Tang. "It just goes to show that having all these smart theories and ingenious ideas is no substitute for a solid business sense based on the fundamentals of supply and demand, with particular reference to the efficiency of the workforce; all those basic components that people such as Warren Buffett emphasise and are often ridiculed for", Tang writes in an article.