Alphabetic fathoming of financial crisis

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By Victor Zhikai Gao (China Daily)
Updated: 2009-10-02 07:46

Now that the G20 has concluded its summit meeting in Pittsburg, the world seems to be breathing a collective sigh of relief. After all, the G20 summit promised to reform, at least to some extent to start with, the international financial system by slightly enlarging the shares of the developing countries in the World Bank and the IMF. However, the United States has not promised any meaningful reform of its domestic financial system. This is enough reason for concern.

As a matter of fact, in describing the current status of the global financial crisis and forecasting whether and when the world will get out of it, many economists have been reduced to simple alphabetic fathoming, producing forecasts like the L-scenario (going down and staying there); the V-scenario (going down and coming up); the W-scenario (going down and coming up, and going down again and coming up again); and even the I-scenario (going down and forever going down, supposedly mentioned by some ultra-pessimistic Russian scholars). Of course, simple signs like the upward-slash /-scenario (going upward forever) and the downward-slash \\-scenario (going downward forever) are supposedly so unlikely that they have not been evoked at all.

In recent weeks, tentative signs seem to indicate that some economies are recovering from the brink of utter disaster. Although there may still be many pains to suffer, the world seems to have finally avoided an all-out financial Armageddon. Or so it seems.

If that is the case, does it mean that finally the V-scenario is going to prevail? Or, even though there may still be ups and downs going forward, at least the W-scenario is going to prevail?

Of course the V-scenario is our collective wish and expectation. But, if the future could still hold ups and downs, doesn't the W-scenario seem too optimistic in pre-supposing going up even before going down again has actually happened?

Therefore, maybe the Cyrillic -scenario should be pondered and guarded against, just in case. The -scenario allows going down and coming up, and then going down again, without predicting too immaturely coming up again after the second wave of going down. Pondering and guarding against the potential -scenario may be necessary and even crucially important. It is all too obvious that, despite the severity of the global financial crisis and the heavy toll it has taken of all the economies in the world, whatever remains of the Wall Street simply doesn't seem to have learned its lessons and may again allow greed to be its principal driving force.

Unfortunately, despite all the eloquent talk and pronouncements about financial reform, there has been no fundamental institutional and regulatory revamping of the financial system in the US to prevent a repetition of the global financial crisis in the future. Simply put, the world has not been made comfortable that another burst of Wall Street greed will not wreck the economies of the world once again.

If that happens, which government in the world will have the political will and financial resources to bail out the culprits again? What will be the outcome of the global public outcry and indignation the second time around?

Therefore, while we all hope for the V-scenario, we need to beware that the W-scenario may be artificially too optimistic and too immature, and the world will be served to guard against a possible -scenario. When stakes are so high, it is better to err on being cautious and conservative.

The author is a director of China National Association of International Studies, a director of the Center for China and Globalization, and an executive director of Beijing Private Equity Association and chairman of the International Committee of BPEA.

(China Daily 10/02/2009 page5)