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Developed countries have still not recognised the onset of a market crash and are proceeding instead on the assumption that injection of liquidity into the system is all that is needed, an Indian economist has warned.
The injection of liquidity is inadequate in a situation where a recession has already started and credit would not start flowing simply because banks could access more liquidity, Prof Prabhat Patnaik of JNU's Center for Economic Studies and Planning said on Thursday.
There must be adequate demand by solvent and worthwhile borrowers for credit to launch viable projects and that is not happening, he said, participating in a discussion on global financial crisis in the United Nations.
Patnaik said the problem is that real lives of millions of people were determined by the whims of 'a bunch of speculators' under the free market system who were interested not in the long-term yield on assets, but only in the short-term appreciation in asset values.
Nobel Laureate and former World Bank chief economist Joseph Stiglitz opined that the US and the Bretton Woods institutions had failed to adequately address the global financial crisis, and the United Nations must intervene as the one institution that was inclusive and had political legitimacy.
Stiglitz said while the crisis bore a 'made in the United States' label, it was in fact worldwide and required a global response, reflect an understanding of the necessary balance between government and markets, and respect the principles of democratic due process, including full transparency.
Patnaik said the new growth stimulus would have to come not from some new speculative bubble, but from enlarged government expenditure that directly improved people's livelihoods, both in the advanced and developing economies, and that is geared towards improving the world's foodgrain output, by revamping peasant agriculture.
"We are now at another Bretton Woods moment," Stiglitz said, noting the Bretton Woods institutions had been founded to maintain global economic stability and employment, not to push capital and financial market liberalisation or promote contractionary fiscal policy amid depression or a recession.
Liberalisation had led to advanced growth, but also increased instability and the global financial system had often worked to the disadvantage of developing countries, he added.
Emerging economies had little, if any, representation in decision-making, and governance structure reform of the International Monetary Fund had been insufficient, he said, waring that the current crisis also threatened to exacerbate poverty in developing nations, and the IMF had failed to propose adequate reform measures to avert the danger.
That situation must change, he said.
Creation of an external shock facility, he added, is a good idea, as is creating a multilateral reserve system with greater stability. There must also be more global cooperation in setting macroeconomic policies, and the creation of a
global financial regulatory commission should be studied.
The global response must also be based on rebuilding trust in the financial markets.
"The financial markets did not do what they were supposed to do, which was to manage risks and allocate capital," Stiglitz said, adding, "We're not going to restore confidence to the markets and the global economy until we re-earn that trust."
General Assembly President Miguel d'Escoto Brockmann agreed with that assessment, saying it is unreasonable to recommend that a little tinkering would restore prosperity or confidence.
While states must pick up the pieces, it would be folly to put the global financial system back together as it had been.
The international community had the responsibility and the opportunity to identify longer-term measures beyond protecting banks, stabilising credit markets and reassuring big investors, he stressed.
He added the stakes are too high for half-measures and quick fixes put together behind closed doors.
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