Back from the Abyss

Martin Wolf of the Financial Times was on Charlie Rose tonight talking about the financial catastrophe that was narrowly avoided this past weekend. He said that the world financial system was on the brink of collapse. Later in the program, economist Nouriel Roubini--who some time ago had warned in detail of what did happen this past month--said that if this collapse had happened, we'd be in a severe recession for ten years.

What saved the system was the IMF and G7 conferences, where governments talked it out, and developed a common strategy of supporting banks along the lines that Gordon Brown in the UK had begun. Wolf said that there was no such agreement on Friday, but by Sunday there was. It wasn't formally a world effort--European nations and the U.S. (which together comprise 2/3 of the world economy) adapted this basic plan to their own national circumstances--but Wolf said it was the kind of concerted effort that was necessary, and had never happened before.

Wolf and Roubini agreed that the amount of money the U.S. has devoted to this is probably insufficient (European nations have pledged much more) but that for now the effort has saved the financial system from total ruin. The economic effects are still going to be felt for some time. Wolf predicts a recession lasting at least a year; Roubini says at least 2 years.

Wolf pointed to a number of relative bright spots, however. He said that U.S. exports are strong, and that the falling price of oil will make inflation very unlikely. He believes most countries will weather this (although some will need help), and most big companies. But there will be failures, particularly in consumer products--especially those depending on selling to rich people.

Both agreed that the U.S. government will need to stimulate its economy with infrastructure and other investments, and soon--which is what the Democrats and Barack Obama have already proposed. The question is whether it will be accomplished soon enough.

Roubini also said what Obama has been saying--that this crisis was caused by the ideology of insufficient regulation of financial institutions, and it went far beyond and far deeper than the housing bubble. Basically, the super rich party is over. And we'll all be paying for it.

Wolf said that the biggest question that will determine how long the recession lasts will be how Americans see the future--whether they have confidence in the future again. It's Obama time, and for once, the American people seem to know what they need.