Financial crisis provides opportunities, says top economist

Jed Brewer, economist and vice president of Finance & Resource Management Consultants, reflects on the current financial crisis and finds a glimmer of optimism for the New Year.

As I look ahead to 2009 and consider what the year may bring, we need only look back a year ago to the end of 2007 to see how difficult it is for any of us to see the future.

Is there anyone that could possibly have anticipated the events that 2008 brought? Someone has said that, “like peanuts, pretzels, and margaritas, forecasts are best taken with a grain of salt”.

Commodity prices and inflation concerns soared in the first part of the year only to be replaced with four consecutive months of wholesale price declines and fears of deflation.

In our industry oil prices rose to over $147 a barrel followed by a collapse to less than $50 per barrel currently.

Multinational banks, brokerage and insurance firms teetered and fell as the subprime crisis worsened forcing global deleveraging.

The velocity of the transmission of fear throughout world financial markets was remarkable. Yields on four-week US treasuries were pushed to zero as global investors left equity markets in search of a safe-haven.

Consumer spending in industrialised nations began to weaken measurably owing to a decade or more of low personal savings rates and an inability to find additional forms of credit. The entire Eurozone, Japan, and the US were declared officially in recessions, with several others on their way.

Indeed, the headlines can be discouraging as we wrestle with the reality in which we live. The fundamentals of the current financial crisis have many similarities to the Great Depression that strained global economies in the 1930s.

A critical difference this time, however, is that as economists, our understanding of monetary policy and adjustments to the business cycle, while admittedly still quite limited, is more informed.

Most central bankers’ primary goal is to avoid a repeat of the 1930s. Accordingly, we have seen unprecedented cooperation among monetary authorities, provision of liquidity to financial institutions to avoid insolvency, and other accommodative approaches to spur economic activity such as the lowering of interest rates (to record lows in some countries).

These innovative and oft controversial responses are direct policy changes to what was done before.

Because of these efforts, I am hopeful for the future ahead in spite of the difficulties that will confront the global economy in 2009. Economies go through cycles where institutions are refined or torn down and new ones are erected. It is these ever-changing market forces that lead to economic progress and the creation of material well-being. In this vein, I see 2009 as a strategic year for acquisitions in our industry and others.

Tightened credit and reduced demand will make business tenuous for some. It is when times are tough and others retrench that well-capitalised market-leaders garner market share at attractive prices and position their businesses to succeed.

It is my encouragement, therefore, to embrace 2009, not hide from it, and make it a key year in the evolution of your business.

Dr Jedidiah Brewer is vice president of FRMC, Inc. (www.studygroups.com)