This crisis will not have a great depression

樊纲 (Fan Gang), member of the China central bank's monetary policy committee, secretary-general of the China's economic reform research foundation at the 6th "上海理财博览会" (ShangHai Financial Management Expo) titled "中国经济未来发展趋势" (China's economic development trend) said that this time there will be big crisis but no great depression.

Prevent The Bubble, The Crisis is Prevented
樊纲 says that all the crisis are the same, be it the Asia financial crisis, the Japanese bubble. If you can prevent the bubble from happening, you will prevent the crisis. But why the huge difference this time? There is a special reason, the US dollar. The US dollar is a country's currency, but there is no restriction on it.

Why the crisis is so huge this time? 60% of the US dollars are on the hands of the non-Americans, 50% of the US dollar assets are own by non-Americans. Thus, the the financial crisis spreaded to other countries worldwide from US. Companies going down could be more than in US and the risks arising from the US financial woes are being taken over by others globally and the US people will feel that the risks are smaller. The depreciation of the US dollar will only do harm to the US rather than benefiting it says 樊纲. When the US dollar depreciates, other currencies will do the opposite and then the risks will not be seen and so covered over followed by lack of supervision. The law of economics says that the bubble will burst sooner or later. US as the world's financial center, the financial risks have been covered up for a long time. The sub-prime crisis was just a small hole that caused the big bubble to burst. The crisis is thus so deep, wide and heavy. It is really the biggest one in human history.

樊纲 thinks that the lessons learned from this crisis is that in order to prevent the crisis, it should start when the bubble starts to inflate. Measures should be taken then when the bubble starts to inflate. The market allocation of resources is the best system that we know of till date but the market still needs a macro control system as a public service.

No Great Depression
Recently, chief economist from IMF said that US next year will have about 100 commercial banks going down. 樊纲 thinks that his is more agreeable that the financial crisis has passed by about 60%. The slowdown of the real economy has just only begun and that we must be mentally prepared for it as the real economy's impact and influence from the financial crisis will be shown more in the coming period of time.

However, 樊纲 is optimistic on this financial crisis impact and influence on the real economy.

Historical data shows that the great depression is a 10 years slowdown. Closures, bankruptcies and 50% of the human production capacity has been wiped out.

樊纲 thinks that there will not be a great depression this time as the difference from the 1930s is that there are macro controls in place, 60 plus years of macro economic growth. After the great depression till the recent few decades of macro economic control policies research and development, people now realize that when big trouble comes, there is a need to work in cooperation together to save the market. 樊纲 believes that the great depression will not happen. The worst case scenario may be that US will not come out of economic downturn for 10 years or so and he does not believe that it will happen.

樊纲 reminds that people must be mentally prepared. In one or tow years time, the western economies, Europe, US and Japan will have slight downturn with a possibility of 2% negative growth. And then the 3 major economies will go into recession and gradually or directly impacting the emerging economies. The emerging economies growth rate will also slow down with this year expecting a value of 4%.

樊纲 says that this time we have the various country's central banks and governments working together to save the market. At the great depression back then, the various country did a trade embargo. The governments then did not have the capability for macro control and the FEDs then did not have the duty for macro control.

4 Trillion Can Stop the Slowdown Speed
Can the 4 trillion solve the problems? Will the financial measures take effect? 樊纲 says that the financial policies will take effect, at least for this year's 100 billion and next year's 500 billion amount put in, according to the growth rate to sustain and to support the bigger piece of the economic growth rate. Can the other needs be addressed? 樊纲 says that it is only an government investment plan, it will not resolve all the other problems. 樊纲 says that the government policies can only stop the slow down of the economy but does not have the capability to resolve the whole basic economy growth problems, but it does have a multiplying effect to drive other demands for a slow recovery.

樊纲 quotes an example that the rail roads project will have demand for steel. But it only uses the steel industry's stockpile now. It will then use up the excess production capacity of the steel industry and then reinvest bringing along growth in other investments and thus sustain the economic growth and stabilizes employment.

As one of the pillars for economic growth, domestic consumer demand is a need. But 樊纲 thinks that China's consumer demand is hard to grow in a short period of time as China's consumption is low, not that the people are not buying when they have the money, the main reason is that the people do not have money to spent, especially the 70% in the low income layer, the people's disposable income is only about 50% of GDP. Consumer demand can only be increased with the people's income going up.

樊纲 points out that the root of the problem is employment and taxation. To grow people's disposable income will touch on a lot of policies and such problems cannot be resolved in a short period of time. The income tax for companies has just been decreased from 33% last year to this year's value of 25%. The reform in taxation is also not an easy task. But to increase the ratio for consumption, a short term policy cannot have much effect.

樊纲 thinks that China is one of the best economic bodies globally. In the recent few months there are slow downs in capital growth, especially hot money has decreased. The main reason being the happening of the financial crisis, capital has flowed back to US and when the crisis has passed, those funds will look for investment opportunities. Looking ahead, the 3 big economies are in recession and funds have to keep investing in emerging economies and to keep investing in countries with the best growth rate. If China can maintain at its 8% to 9% growth rate, the funds will return.