NEW HAVEN, Conn. — The world's fundamental economic problem today is a staggering loss of business confidence. Commercial banks, investment banks and hedge funds all owe their ongoing trouble to its decline, which in turn is jeopardizing the plans of companies and entrepreneurs to launch enterprises and make investments, and of households to consume.
Our "animal spirits," to borrow a phrase made famous by John Maynard Keynes, are weakening. George Akerlof and I have just written a book by the same name, but by the time "Animal Spirits" appears later this winter, the world economy may be even worse than it is now.
Nations everywhere are starting to implement aggressive stimulus and bailout packages. Yet the economic outlook still looks grim. The International Monetary Fund's latest forecast predicts that the world's advanced economies will contract 0.3 percent in 2009 — the first such shrinkage since the end of World War II.