Looking back at what I wrote in this space this time last year, I find that I was dreaming of a Japan of the United States, in which the regions become city states unto their own and make Japan a generally more interesting place. The dream still remains but a dream. But I keep hoping.
So what of my dreams this time round? It has to be said that they are rapidly taking on a nightmarish quality.
2007 closes on a note of great anxiety — anxiety over the state of the global financial market.
Nervously looking back into history, one wonders whether 2008 is about to see a repeat of what happened in 1929 and in 1987, the two occasions in which the New York stock market crashed with a vengeance, leading to general turmoil everywhere.
The 1929 crash brought on the Great Depression. The 1987 stock market setback did not lead to a depression as such, but rather paved the way for the subsequent stock market bubble in Japan and all the toil and trouble that followed.
A repeat performance of either would be dire indeed to contemplate. Yet the really frightening thing about what we may be about to dream is that it brings us into the territory of the unknown.
It is unknown territory because both the past two financial crises started out as essentially country-specific domestic difficulties. Of course the root causes of the problems transcended national frontiers. Yet the fact remains that it was a question of one nation initially feeling the pain, with all the others being eventually sucked into the maelstrom.
This time round, however, things are considerably different.
In short, the crisis is unfolding everywhere, at once. If anybody had been in doubt of what globalization actually means in practical terms, the unraveling of the subprime loan problem should have been the ultimate eye-opener.
The subprime loan problem itself may indeed be a U.S.-specific difficulty. But the art of securitization turned it into a global one. By means of this vehicle the seeds of turmoil had been strewn all over the world.
Contagion is now no longer the worry. It is no longer a case of a small outbreak spreading into a pandemic. The pandemic is there to begin with. No one is immune. Not unless you were thinking of emigrating to the moon, anyway.
Nothing highlighted this point more than the coordinated action, or at least what was announced as the coordinated action, among the world’s five major central banks to confront the problem.
Central banks are by definition responsible for national economic stability. Their essential mandate is to keep the nation and its currency out of trouble in times of volatility. At least that was the case when national borders meant something in economic terms.
Indeed, what caused the crash in 1987 was the lack of coordination between U.S. and the then West German monetary policies. The U.S. wanted to reduce interest rates. West Germany wanted to raise them. The monetary authorities of both were in pursuit of their national interests. This compounded the problem, but at least they were each true to their mandate.
Such moral satisfaction is no longer a luxury that central banks can afford. Whatever the dictates of the domestic economy, central banks now have to act together to combat the demons of financial globalization.
Does this imply the need for a single global central bank? That is probably the worst nightmare of all.
Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.