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Financial crisis need not lead to Great Depression, says expert
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By Wang Zhiyong

As for the current uncertain outlook for the world economy, Dr. Fan Gang, director of the prestigious National Economic Research Institute under China Reform Foundation, said on October 13 that the spread of the global financial crisis originating from the United States need not result in a major 10-year depression like that of 1929. The zero or even negative growth of the world's three major economies, the United States, Europe and Japan, may last for no longer than two or three years.

Dr. Fan made the remarks at the Capital Market Summit during the on-going 10th China International Hi-tech Fair, held annually in Shenzhen, south China.

He believes that the impact of the US financial crisis has a broader and deeper base than that of 1929. "It’s still too early to tell when the crisis will end, how many banks and financial institutions will collapse, and how long housing prices in America will continue to decline," Fan said.

In his view, the roots of the crisis go back some decades, to the time when the US dollar became a central currency independent of the gold standard. This also helps to explain how the crisis has spread the financial risk onto the global stage, and why many problems have been covered up. Economists were still optimistic even when America had been carrying a 5 percent budget deficit and a 7 percent trade deficit for several years. The regulators in particular ignored the build-up of risk.

However, Fan Gang holds an optimistic view of the controversial US bailout plan to rescue the market. "The 1929 financial turmoil led to the Great Depression, when governments lacked the concept of macro-control. Ben Shalom Bernanke, an experienced researcher of the Great Depression, well understands the physical damage to the economy as the financial chain broke down."

He also said that “governments should take the responsibility of providing macro-control services in a modern market economy, but that action should be taken early, while the bubble is forming, rather than provide a hasty remedy once the crisis is already upon us.”

With regard to the impact of the US financial crisis on China, Dr. Fan said that the bad debt bought by China's financial institutions from the United States was not a large sum, so the direct financial impact on China will be limited. However, China's real economy will suffer a heavy blow. With the United States, Japan, and Europe all in recession at the same time, the international price of resources will drop, which will have a negative impact on China's export-oriented and resource-based economy. Coupled with a negative psychological perception of speculation, investment will also slow down.

"It is time to adjust our macro-policy. Now, the pressure of inflation has slowed significantly, and expanding domestic demand should be the main immediate focus of macroeconomic control. An increase in real estate investment as well as adjustments to taxation and land policy can all be considered," Dr. Fan said.

Note: Dr. Fan Gang is a highly distinguished economist trained at the Chinese Academy of Social Sciences, an elite government think tank overseeing numerous research institutes. In addition to his duties as a professor of that think tank and director of the prestigious National Economic Research Institute, Fan devotes his considerable energy to serving as an advisor to the Chinese government and consultant to a number of international organizations.

(China.org.cn, October 14, 2008)

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