GLOBAL View point
To halt the financial terror spreading throughout the world from Wall Street, the US needs to assemble a coalition of the willing to provide liquidity to ailing banks
OHMAE
Kenichi Ohmae, Japan's leading management guru, is the author of 'The Borderless World, The Invisible Continent' and 'The Next Global Stage'.
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| Royal Bank of Scotland (RBS) branch in central London, on Tuesday, when shares in major British banks suffered sharp falls in early trade. RBS plunged by nearly 40 per cent, although it improved later. |
TOKYO Instead of creating stability, the passage of a $700 billion rescue package in the US last week has sent a wave of financial panic across the world. That is because the package _ aimed at buying out bad assets from ailing banks _ did not address the urgent issue of liquidity.
Without an assured supply of cash that would give troubled financial institutions the time to rebuild their balance sheets without fear of bankruptcy and plummeting stock prices, the wolf pack mentality will take over.
That means weakened banks will collapse as investors and depositors flee or are taken over in succession until only a few are left standing intact. During the past few days in Europe, this mentality has moved beyond banks to whole countries, with Ireland and Germany snarling at each other.
The first financial panic of the 21st century is characterised by people withdrawing their funds with a click of a mouse on their computers. This cyber-run-on-a-bank is like a neutron bomb. You don't see the damage on the street, but it can kill many financial institutions within days.
We witnessed two weeks ago how one quarter of the $300 billion deposits of Washington Mutual were drained electronically in one week. Had it stopped its electronic banking service, this would have resulted in a classic panic on the street. So it had to run to the US government to be rescued.
Had Washington Mutual had access to the deep pockets of a liquidity pumping station _ which I have proposed be set up on a global scale with a capitalisation of $10 trillion for the US and $10 trillion for Europe and the rest of the world _ they would have been able to work out their problems and survive.
A cyber-run-on-a-bank is what seems to be happening in the UK, as people are transferring money to Irish banks and, believe it or not, to Northern Rock, a now-nationalised (and hence safe) haven.
German Chancellor Angela Merkel at first opposed establishing a pan-European rescue package at the Euro pean summit over the weekend, accusing Ireland of being self-centred for unilaterally guaranteeing its bank deposits. It took her only one day to change her position. Not only did she agree to the rescue of Hypo Real Estate Bank, but announced that Germany, like Ireland, would protect all deposits in German banks. Spain, Denmark and Austria have announced they intend to follow suit.
Now that the crisis psychology has spread throughout Europe, it is even more important to establish an emergency international facility to provide liquidity. The money to be gathered in this pumping station _ or Emergency Room as the Swedes called the liquidity pool set up to solve their banking crisis in the 1990s _ has to be sufficiently large so that investors and depositors do not feel that it is a shallow oasis.
To successfully capitalise the requisite liquidity pool, the US, for its part, needs to reconfigure its entire foreign policy. The Bush doctrine has focused on the fight against terrorism, while the most urgent battle now is against financial terror spreading around the world from Wall Street. That means establishing a coalition of the willing that includes all the big reserve countries _ Japan, Russia, the Gulf states and China.
The rest of the world, however, cannot just let the Americans alone figure out what to do because what they do immediately impacts all of us now.
In Japan alone, we have piled up $6 trillion in US government securities (USGS). If Uncle Sam prints massive amounts of fresh greenbacks in the name of the rescue package, it will cause the value of USGS to fall. Since 45 per cent of all USGS are currently held by non-Americans, it will damage the entire world.
It is in the best interest for the have countries _ those holding U.S. reserves _ to chip in rather than watch the Americans use their printing machines to mint more money, thus inflating away the value of our holdings.
Neither US presidential candidate, not Barack Obama nor John McCain, seems to grasp what needs to be done in this new 21st century environment to stem the spreading panic. If the US does not step up to the plate, then the Europeans should. This is now as urgent a problem for them as it is for America.
2008 Global Viewpoint, Distributed by Tribune Media Services
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