14 November 2008
Economist Discusses Causes of Global Economic Downturn
Says countries must find right mix of capitalism, government intervention
Washington — Trouble in housing markets, regulatory structures and capital flow have contributed to the global economic downtown, according to James Barth of the Milken Institute.
Barth, during an America.gov webchat November 12, explained some of the problems that precipitated the downturn in the U.S. financial markets, in particular the subprime mortgage crisis. These mortgages, which were extended to individuals with questionable creditworthiness, often were securitized, meaning they were pooled into securities and then were sold internationally. When the loans declined in value due to the inability of homeowners to pay their loans, the securities declined in value also, spelling trouble for investors.
“Firms that have too little capital and too many assets are at serious risk of insolvency should those assets decline in value by even a relatively small amount,” said Barth. “Financial regulatory authorities have to, therefore, reassess the appropriate amount of capital that should be required for financial institutions.”
For now, the international community is looking to find ways to ameliorate the global financial situation. On November 14 and 15, Group of 20 leaders will convene in Washington to discuss the causes of the present situation and ways to reform the global financial system (see “Washington Prepares for Global Economic Summit”).
Barth said that China, Indonesia and India, which will be in attendance at the summit, have made important contributions to world economic growth. Both capitalism and government intervention have been methods of promoting economic growth in these countries and others around the globe, he said. But knowing the appropriate levels of each is a difficult. “The difficulty lies in choosing the right mix of the two approaches at the right time to promote stable and long-run growth, and this will depend upon the circumstances of the individual countries,” he said.
While Barth, who is also a finance professor at Auburn University in Alabama, predicts that the housing market in the United States might not improve until mid-2009, he said the economic outlook is not close to becoming the next Great Depression, the last large-scale financial turmoil in the United States. About 9 percent of all mortgages are behind in payments today, compared to about half during the Great Depression. Barth also said the current unemployment rate, 6.5 percent, is much lower than the 25 percent rate during the Great Depression.
See the transcript of Barth’s webchat.
