Financial journalist
compares crisis to 9/11
 |
| Greg Ip says that while the economy will recover, the world's financial landscape will remain altered. (Washington and Lee University) |
The impact of the current global financial crisis is similar to the after-effects of 9/11, financial journalist Greg Ip told an overflow crowd at Washington and Lee University last week.
“When I look at the events around us now, I think of 9/11,” said Ip, U.S. business editor for The Economist magazine.
Ip predicted that the trauma of the recession would continue to affect the financial world long after the economy recovers.
“Things will eventually return to normal, but in the background, our financial system will be more heavily policed and more risk-averse than before,” he said. “And that nagging feeling of financial insecurity about our 401(k)s, our homes, even our bank accounts … maybe that feeling will never go away.”
As 9/11 did with attitudes about security, Ip said the financial crisis has changed the way people think about risk, government intervention, debt and investment. He predicted consumers will save more and spend less, and that the government will take on a bigger role in banking.
Financial institutions will be forced to change many habits following the crisis, and banks will go back to basics, Ip said. He predicted that “shadow banks” – investment banks, hedge funds and a host of other institutions – will lose their prominent roles in the new financial world.
Because the subprime mortgage sector deteriorated rapidly, banks have been forced to foreclose on a rising number of homes in the United States. The soaring rate of defaults on mortgage loans has raised questions about the adequacy of credit regulations and ethical lending practices.
While critics of the financial sector blame irresponsible lenders, Ip faulted the U.S. government for equating home ownership with the American dream.
"Many people move too often and earn too little to support a mortgage payment,” he said.
As government intervention continues to increase in the nation’s largest industries, America’s “medicated markets” are sure to see long-term changes and increased regulation, Ip said.
“The challenges are profound, and I have to confess that I am pessimistic,” he said.
Ip said political obstacles continue to hinder efforts to address economic problems.
“People in Congress frankly are not having much fun going back to their constituents and telling them, ‘Yes, we borrowed $700 billion to bail out banks, but we need more,’” Ip said.
Meanwhile, House and Senate conferees apparently have agreed on a $789 billion stimulus package that appears to be headed for Congressional approval this week. President Obama could sign it into law as early as Monday.
Ip predicts credit markets will continue to see improvement in the coming months, with the recession ending by the end of 2009. However, he sees a long and difficult road to renewed growth.
“Although I am pessimistic, I am not fatalistic,” he said.
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