The unfolding financial crisis, the worst since the Great Depression, is now affecting the real economy, with lending at a trickle, unemployment rising and retail sales falling, William R. Rhodes, Senior Vice-Chairman, Citigroup; Chairman, President and Chief Executive Officer, Citibank NA, Citi, USA, warned participants in a session on the risks to global growth at the World Economic Forum’s Annual Meeting of the New Champions 2008.
“Decoupling is not a reality. What is happening in the markets in the US is affecting the credit markets worldwide. We are in a crisis of confidence. There is just no confidence in financial institutions in the market.”
Rhodes argued that the financial rescue package currently under negotiation in the US Congress must go forward. “You need that to be approved to put a floor under the housing market.” Coordinated global efforts to restore confidence “so the market can start functioning again” are necessary. “The financial system has to be recapitalized not just in the US but around the world,” Rhodes reckoned. “One of the things that must come out of this crisis that did not come out of previous crises is some form of international accounting standards. We really need a set of internationally accepted regulatory norms. We are too tied together in a globalized world.”
That call was echoed by Liu Mingkang, Chairman, China Banking Regulatory Commission, People’s Republic of China, “What we must have is international cooperation,” said Liu. “The current crisis is global in nature but regulation is still based on the national.” He added: “The degree of leverage nowadays is dangerous and indefensible. Worse, it is not regulated by any prudential supervision. The problems of the Asian financial crisis 10 years ago have appeared once again.”
Liu told participants that the Chinese economy is “quite okay”, though growth may come down from 11% to 9%. “This is good for China. China doesn’t need speed first; China needs quality first.” He suggested that other countries learn from the close macroeconomic management and supervision that China has exercised in recent years. When US regulators allowed down payments on housing purchases to zero and permitted so-called reverse mortgages, “we saw this as ridiculous,” Liu remarked.
Chinese monetary authorities are communicating and sharing information with regulators around the world as they monitor the crisis, Liu said. “During this turmoil, we will be careful and watchful.” In the end, blame for the meltdown should rest with the leaders in the financial sector. Companies need to refocus efforts on risk management, better governance and responsible leadership. “Fish doesn’t stink from the tail,” Liu reminded participants.
