Financial Fixes

 
Since the 10th Foodservice Summit in September, the economies of the USA, France and Germany have started to show modest GDP increases. But, according to Norbert Walter, chief economist of Deutsche Bank, it will be some time before the long-term implications of the global financial meltdown are fully understood, or resolved. By Bruce Whitehall.
 
Professor Dr. Norbert Walter warned that no part of the world was untouched by the crisis and the reasons for it were multifarious, varying considerably from one country to the next. "There were a number of staged processes," he pointed out. "And some of the negative fallouts have still to come because of time lags." Some countries had been overbuilding like mad and had a real estate imbalance. For some, commodity values which had attained unprecedented highs quickly went into a tailspin. Even countries which had no real estate or commodity problems proved not to be immune. And a lot of people started to realise that their wealth was illusory. While the causes of the downturn were diverse, Walter felt that one single event - the unexpected collapse of Lehman Brothers - was the big triggering point.
 
"Everybody believed that governments would bail out such important institutions," he pointed out. When this did not take place, everybody was frightened to death and people were only interested in one thing - liquidity, both between banks and companies. Even quality assets went into fire sales, so a lot of money was lost. Hence the rescue packages by central banks and such moves as lowering interest rates to a level not much above zero. Much of the stabilisation may well prove to be at the expense of future generations. Some packages were of unprecedented scale, amounting to 15% of GDP in Russia, China and the Arab world. Even in the USA, the two-year package introduced amounted to 7%. In Europe, however, rescue packages averaged out about half the American level and that depended on whether there were high existing levels of indebtedness (as occurred in Hungary, Greece, Portugal and Italy).

In fact, only the British, the Germans and the Irish had truly sizable economic stimulus packages. Even then, very few measures had an immediate effect, apart from the ‘scrappage' of old cars and reduction of value-added tax rates for defined periods. Talking more specifically about ‘cash for clunkers', Walter pondered whether the schemes successfully introduced in Germany and copied in the USA, Britain and elsewhere were overselective. "There's no reason why, for example, old freezers or refrigerators or other consumer durables should not have been eligible for scrappage  subsidies," he pointed out. "I would have advised it, but nobody listens." The car scheme succeeded most perhaps because it involved such a conspicuous personal asset. "All of a sudden the richer guy finds out that the poorer guy in the street runs around with a new modern car while he is still sitting there with his damn old banger," Walter explained. Such social pressures helped the beleaguered motor industry and the wider economy. But where do we go from here? How will we fare if the supply of drugs like low interest rates comes to an end? This should not necessarily be a problem, Walter felt. In later questioning, he forecast that European central banks would exit from zero interest rate strategies in 2010. Some inflation could ensue but, according to studies by Deutsche Bank research, this should not necessarily pose a problem. He also forecast that the next year could suffer from the withdrawal of excess liquidity
 
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