Rapid increase in the availability of funds for the lending purposes has supported the decline in the lending standards, but a considerable affect was caused by the wrong easy money policy administered by the most of the developed and developing countries. But more weight is placed on the countries which have an impact on the dependent economies. As the consequences showed, the easy money policy through creation of excess of money in the global economy followed by the high volume of loans eventually caused the crash of the economy and financial crisis.

This policy was not justified and logically tight money policy could help in improving the situation, but there are still some disagreements this solution. This could be the case at some instances, but still have some limitations on the small open economies and in countries with advanced financial systems, as they probably have access to foreign credits from parent institutions. Accordingly, in this case it will have an effect of substitution of domestic and foreign exchange rate regimes.

According to Onado, three aspects of potential remedies could be considered against financial crisis: credit ratings, evaluations of asset marketability and transparency in the retail market of financial assets. Implementation of these policies would most probably be helpful and could cause some positive effects for the global economy. Recovery of the confidence in the financial system should be attained as soon as possible in order to move ahead. The market should be cleaned from “spoiled” securities and all the financial resources should be directed to recover the live ones. The government should purchase illiquid assets to help institutions to survive. And all the process should be transparent for the people to be able to monitor, judge and trust the survived institutions. This will help regaining confidence financial institutions.

The Wall Street Journal Digital Network debuted today ‘The End of Wall Street: An Oral History,’ a three-part documentary-style series created in partnership with Wall Street Journal Books that presents an in-depth look at the 2008 financial crisis as told by the reporters and editors who witnessed history and defined the coverage. ‘The End of Wall Street’ — http://wsj.com/EndofWallStreet — is available for free on WSJ.com, MarketWatch.com and Barrons.com. The documentary is narrated by Dave Kansas, former Journal editor

HIGH COMMODITY PRICES - high oil prices, which led to both high food prices (due to a dependence of food production on petroleum, as well as using food crop products such as ethanol and biodiesel as an alternative to petroleum) and global inflation. In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year. By July the price of oil reached as high as $147 a barrel.

INFLATION - In February 2008, Reuters reported that global inflation was at historic levels: “Excess money supply around the globe, monetary easing by the Fed , easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets,” have been named as possible reasons for the inflation.

UNEMPLOYMENT - The International Labor Organization predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis - mostly in “construction and real estate, financial services, and auto sector” - bringing world unemployment above 200 million for the first time.

See some country figures:

Canada
In 2008 Canada’s GDP decreased by 0.1% due to decline in:

1. mining oil and gas industry - 1.2%
2. automobile production - 3.6%
3. Construction output in Canada - 0.4%
4. Utilities - 1.3 %
5. Farms production - 0.9 % less.

In the first quarter of 2008 Canada’s economy shrank by 0.3% and the Bank of Canada said second quarter growth would likely be less than 0.8% projected.

European Union
In the euro zone as a whole, industrial production fell 1.9% the sharpest decline for the region since the exchange rate crisis in 1992. European car sales fell 7.8% compared with a year earlier. Retail sales fell by 0.6% in June from the May level and by 3.1% from June in the previous year. Germany was the only country out of the four biggest economies in the euro zone to register an increase of activity in July though the increase was sharply down. Economic analysts said the decline would raise the risk of the euro zone entering a recession in 2008. In the second quarter, the euro zone’s economy was reported to have declined by 0.2 %. The economy declined again in the third quarter putting the euro zone in a recession.

China
If all other countries of the 7 largest economies in the world by GDP stay in recession, only China would avoid a recession in 2008. In the year to the third quarter of 2008 China grew by 9.7% but experts say it will drop to 8.5% in 2009. On November 9, 2008 China announced a package of capital spending plus income and consumption support measures. 4 trillion Yuan ($586 billion) will be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection.

Market downturn Fall 2008
As of October 2008, stocks in North America, Europe, and the Asia-Pacific region had all fallen by about 30% since the beginning of the year. The Dow Jones Industrial Average had fallen about 37% since January 2008.

Countries which experienced recession in 2008

• First quarter of 2008 - Denmark and Iceland went into recession but came out again in the second quarter.
• Second quarter of 2008 - Estonia, Latvia, Ireland and New Zealand
• Third quarter of 2008 - Japan, Hong Kong, Singapore, Italy and Germany. Also the fifteen nations in the European Union that use the euro went into recession in the third quarter.
• Fourth quarter of 2008 - United States, Britain, France and Sweden all are expected to go into recession.

When all seven largest countries in the world by GDP stay in recession, only China avoided a recession in 2008. In the year to the third quarter of 2008 China grew by 9%.

What about Georgia?

Developing countries’ economies have been growing faster than economies of developed countries for some time now (China, India and even Georgia to some extent are good examples). But it is now clear that the financial crisis that emerged in the developed part of the world will not stop spreading over its poorer parts: Chinese trade shrank for the first time since 2001; India’s industrial output fell for the first time since 1994, and Georgia, although predicted to overcome the current effects of Russian aggression of August events successfully, thanks to the financial aid from many of the developed countries, will still have to face an economic slowdown next year.

What does it all mean to an average Georgian? For those of us who have no specific education in economics and who, thus are not able to see the bigger picture, global financial crisis means uncertainty. The term itself says that our brain falls short of certainty to almost completely lacking conviction or knowledge especially about an outcome or result of global problems facing the world economy.

Just think a little bit, how many times, in minutes of despair that nothing works out the way you’d like it to work, have you decided to yourself, to leave everything here and go abroad to work and save money for future? Think a little bit harder and you will remember how many times such thoughts were just a matter of moment, a very hard moment and you didn’t really think of going anywhere – however, thinking of places where life provides better opportunities for all, made you feel better and strange as it may sound, more secure.

And what happens now? Now it seems there’s nowhere to go because every place, every corner of the world faces problems. In the era of television and information, in general, when most of the times we live in the virtual world as portrayed on TV screens and web-pages and as press continues to report more and more on crisis, the degree of uncertainty rises. More so, when no one knows for sure how long it will take to get out of this, or how far it reaches, or how extreme the effects will be. So, it seems, there is no room left even for illusionary security.

Losing or the fear of losing security (and income) has much more negative effects on being happy than gaining both. Global financial crisis affects these two important pillars of happiness – security and income. It’s true that not everything can be bought for money; however, it’s still nice when most things are at your disposal.

So crisis, by definition, is bad for happiness. In the real world unhappy people ask many questions: Will I maintain my job? Will I have enough money to celebrate New Year and Christmas? Will I be able to take my kids to school next year? Will I be able to sustain my business? Will I be able to pay taxes? Will I survive?

2009 has to be the year when those with specific economic knowledge who see the bigger picture decide that answers to these questions must be positive.

Second point of Nash was “internationally oriented money standard”. I think it is quite interesting idea, especially for small open economies with political instability. And if we consider nowadays tendency of globalization some time in the future the word “exchange rate” might be dropt out at all. But in the nearest future it is impossible, because national authorities have strong intentions to keep their places. But still it is difficult not to agree with Nash that “having an internationally oriented money standard would promote better quality currencies and less inflation.”

During the lecture the speech was done also by another famous economist Dominick Salvatore, Ph.D. He mentioned that more transparency is needed. I think it is very much similar idea what was presented by Professor Michael Beenstock, during the roundtable discussion at ISET. The philosophy of the New Financial Architecture is quite simple, just banks should disclose information about their loan portfolio. And then public will decide weather invest in this bank or not. From my point of view this scheme may work, but implementing it now will not bring any major positive effect. But for future when the situation stabilized this kind of information should be available for public. And a person should decide by himself whether he/she wants to participate in risky portfolio and get higher interest rate or it’s enough to get small but stable income.

I strongly recommend all of you to read the whole article at the link:
http://www.fordham.edu/Campus_Resources/eNewsroom/Archives/2008/archive_1377.asp

So dear friends what do you think about Nash’s idea of “internationally oriented money standard”?! Will it ever happen? Or national interests will be a winner always? Also who attended Professor M. Beenstock lecture I would like to hear your comments concerning New Financial Architecture? Do you think disclosing information now can contribute much in recovering world economy?!

And is it A solution or as was argued by Professor Beenstock, during presentation, it is THE solution?! (For those who was not there I will try to post Professor Beenstock’s paper later today or next week)

In September I read the interview with Google’s CEO Eric Schmidt at “McKinsey Quarterly”, and he said that recession is the good time for investments. This mean crisis is not the utmost evil, it’s also an opportunity.

At a recent conference in Southern California 1,000 investment professionals came from all parts of the United States to hear and talk to 330 aspiring companies. Many of the companies were developing environmental, clean energy, cellphone, water treatment and biomedical technologies.

It is likely that anything clean or green technology, like solar energy, will attract funding immediately.

The same enthusiasm was at the Montgomery & Company Technology Conference in March in Santa Monica, Calif., which attracted more than 500 investors and 160 companies. Most companies at the Montgomery conference were privately held and worked mainly in the fields of social networking games and communications services for mobile communications devices.

It is also a good time for mobile phone companies selling entertainment and services for phones and innovating on the Internet.

It seems that venture capital hasn’t been struck greatly as real estate and debt markets. At the moment investors with capital have less competition because large investment banks and hedge funds are affected by the financial crisis.

Some businesses seems to be countercyclical to the crisis, they offer products or services that are increasingly in demand. Here are some spheres that thrive in hard times.

Standing up for workers - law firms that represent employees and protect their rights in the economic downturn. It looks that law firms can’t dream about bankruptcy at the time of crisis. The issue is just to follow the market needs.

Tracking accounts receivable - task of tracking and pursuing accounts receivable is in demand in downturn.

Helping commercial borrowers - help buyers of commercial real estate for instance to take over the mortgage.

Liquidating machinery and inventory – helping banks dealing with troubled companies.

Advising troubled companies – dealing with assignments from troubled companies.

Producing chocolate and sweets – people eat their favorite candies to take the stress away.

Professor Muhammad Yunus, Nobel Peace Prize laureate known as the ‘banker to the poor’ was also optimistic during the interview with Reuters “This is the disaster of a lifetime, and disasters are very painful, but it’s also an opportunity.”

Mr Yunus argued for new accounting and legal standards that would allow for a second separate industry, so-called ‘social businesses’ such as Yunus’ own Grameen Bank, to emerge. World leaders could encourage new types of lending that would let the poor take themselves out of poverty without the risks of the traditional system that has just failed.

Hope to see any comments and developing of the theme providing other examples of success in the time of downturn.

Oliver Hart and Luigi Zingales - Economists Have Abandoned Principle,

Joshua Rauh and Luigi Zingales - Bankruptcy to save GM,

Luigi Zingales - Causes and Effects of the Lehman Brothers Bankruptcy,

Chicago Business School - a Faculty Panel on “What Effects Will be and What Should be Done”,

Ken Rogoff - Inflation is Now the Lesser Evil,

World Bank - Global Economic Prospects.

Commentaries on these readings are welcome.

In almost every economic crises fear plays a big and negative role, that’s what is going on in recent economic crises. “More than anything, it’s a crisis in confidence.”… “Fear is what’s driving this. Yes, things are bad, but the fear is greater than the reality.” [Carter Doyle, professor of economics.
http://www.finchannel.com/index.php?option=com_content&task=view&id=21683&Itemid=9].

When the fears about possible crises gets bigger people cut spending money and therefore sales go down; the banks fear to give credits and all this causes economic activities to decrease, stocks to go down, manufacturing slows and therefore fuel prices fall. This is further followed by cutting jobs, inflation and recession or even depression. It is like a “chain reaction” caused by atomic bomb. That is exact scenario of what happened in USA and many other countries. Therefore it can be concluded that if someone can control the fear then he/she can control the whole global economy.

So how do you think, is there anything the government or leading businessmen can do to decrease the fear among consumers and investors?

Would it be better if government would not disclose the negative information about economy or this will cause bigger problem?

As leaders of the government explained, this was the only way out for stabilization of the banking system. Government bought preferred shares of the banks in trouble. Minister of Finance Alister Darling claimed that Government wouldn’t manage banks, only give them support.

It gives positive effects for avoiding bankruptcies of banks and for suspending decline of stock market. Also stability in banking system gives a good chance for minimizing reduction in the industry.

As about negative effects, traditionally, investors do not prefer to come to the sectors that have government’s shares. But in the time of crises stability is more important then growth of investments.

I think, nationalization in the time of crises is a useful action. It gives opportunity for supporting banking system. It accordingly gives opportunity to save economy and to avoid panic.

Will such instrument work in the East-European countries?

In the time of crisis policy of government should be directed to the 3 main tasks:

1. Saving wages for people who work in budget sphere and social subsidies;
2. Guarantee stability of the banking system and avoiding considerable devaluation of national currency
3. Avoiding reduction of unemployment and of GDP.

First task should be realized by government with the help of the fiscal policy. But second and third tasks can not be realized without government’s intervention to the market.

Nationalization is one of the possible ways to solve second and third tasks. So, I propose to discuss: should government of your country nationalize banks in the time of crises or shouldn’t?

For avoiding devaluation of Hrivya, National Bank of Ukraine can extend quality of US dollars injections. For stability of the banking system, the National Bank should support liquidity of banks with credits or with buying preferred shares (Using British experience or in other words – make formal nationalization).

I don’t believe that it gives some result in Ukraine (also in the rest countries of east Europe).

“Weak or formal nationalization” (government buys shares but in fact does not manage banks) can be effective in Britain or Europe. British government fells certain that banks using government trenches and money from selling shares will support industry and business with credits.

But I do not believe this will work for Ukraine. Nationalization of banks can be really effective method for supporting economy. But this nationalization should be ”full”, in other words, government should manage leading banks in the case of their problems with liquidity. We have already had a lot of examples when commercial banks receiving cheap US dollar credits for supporting Hrivya used it for speculation and even crediting other foreign banks outside of Ukraine.

Conclusion: In my opinion, government should nationalize some banks in trouble and realize government policy in such way. Giving cheap credits to banks is the same as throwing money to the black hall.