A world expert on economics delivered a cogent and optimistic analysis of the meltdown, its causes, its cure and its effect on the future at the recent Global Business Forum in Banff, Alberta.
Dr. Nariman Behravesh, chief economist with IHS Global Insight, blamed twin "addictions" for 2008's financial catastrophe: dependency on easy credit on the part of nations with trade deficits and excessive reliance on exports by those with trade surpluses.
"Germany and Japan have been hit harder than the U.S. because trade surplus countries have been hit harder than trade deficit countries," said Dr. Behravesh.
This vicious circle fueled global growth until the credit markets sank in August 2007. Then the final straw was a year later when Washington let gigantic Lehman Brothers go bust.
"[Lehman's bankruptcy] was the one of the biggest policy blunders since the Great Depression. Credit markets completely froze and a mild recession turned out to be the worst in decades. It was totally avoidable," he said. "Fortunately, government actions after that avoided the Great Depression 2.0."
His keynote speech addressed a number of key questions: Is the recession over? What will drive the recovery? What will be the shape of the recovery? Will there be inflation problems? And how will U.S. debt affect the value of the US dollar?
"The U.S. third quarter will show a 4% [annualized] growth; Canada 2 to 3% but unemployment will climb and peak six months from now," he said. "Indicators always lag so the recession's over but not all the pain."
The recovery will be aided by bank rescues, monetary policies with low interest rates, central bank involvement and fiscal policies such as stimulus and reduced taxation.
"There is pent-up demand in the U.S. Nine out of ten households are able to afford a new house or car, corporations are cash-rich but people are scared," he said. "Consumer spending should increase in three to six months."
The recovery's shape will be a "mild W" (or up and down and up) not a "V".
"U.S. consumers represented 15 to 20% of the global economy and their spending grew by 3% a year," he said. "Our forecast is that spending growth will increase by 2% going forward."
No inflation worries
Slower growth will help abate inflation and the U.S. deficits and debts will be manageable in the future, he said.
"Wages are two-thirds of costs and with 10% unemployment there won't be wage inflation.
China is adding to excess capacity which will mean lower prices there and in terms of commodities there will be no big price rises in the foreseeable future," he said.
America's indebtedness won't trigger inflation rates any more than did Finland's or Japan's debts, considerably higher than U.S. forecasted debt. Those two countries suffered financial crises in the early 1990s but zero interest rates and no tax hikes helped them keep inflation at bay then and the same policies will do so now, he said.
"Some say U.S, debts are not sustainable but I'm not worried about a collapse of the U.S. dollar," he said. The biggest looming costs are health care because American health care costs are rising too rapidly.
"The other currencies are no alternatives," he said. "The U.S. dollar is the best looking horse in the glue factory."
Diane Francis blogs at the Financial Post