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Crisis more severe than we think
Stock market data
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Renita Jablonski: And then, we have this forecast from one of the world's top economic institutions: The global economy is facing a much harder landing than many expect. The Bank for International Settlement says many analysts underestimate the scale of the coming downturn. From London, Stephen Beard reports.
Stephen Beard: The bank represents the world's top 55 central banks. Its annual report out today is pretty grim. The bank draws parallels between the current crisis and other severe slowdowns, including the Great Depression. In virtually every case, says the bank, the downturn was preceded by a very long credit boom.
Andrew Hilton is with the CSFI think tank in London. He says the bank is urging policymakers to look beyond the subprime crisis:
Andrew Hilton: Look at the enormous growth of indebtedness, personal indebtedness, government indebtedness. That's the problem. And unwinding that is going to take an awfully long time. And it could require a long period of pain for a lot of people.
The bank says the U.S. and other economies could, after a temporary period of higher inflation, slip into an era of falling prices. And that could trigger either very low growth or deep recession.
In London, this is Stephen Beard for Marketplace.
The trouble is that many central banks have only one function in their charter: to fight inflation and thus protect the currency. Thus when TOTAL inflation increases, i.e., the "core inflation rate" plus food and energy, from 2% to 4% the EU central bank automatically raises its interest to slow down the EU economies by causing unemployment and therefore depressing pay pressures. But this downturn is different: central banks can do nothing about skyrocketing oil and commodities prices. And when the cost of gasoline doubles, the cost of trucking skyrockets, rocketing cost increases throughout an economy faster than M1 changes. When the prices of EVERYTHING jump and pay increases don't happen, folks respond by contracting buying and filing for bankruptcy. And these defensive measures push the world into a severe downturn. Add big financial institutions failing from a liquidity-subprime mortgage crisis that won't unwind until 2014, and you have a world economy on the brink of collapse. Think 1929-1930.
