Debt-ridden and credit-fuelling states made crisis worse, top economist says

 
Julian Harris
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HIGH government spending deficits and the credit-fuelled boom left many wealthy countries particularly vulnerable to the financial crisis, a leading economist said in London yesterday.

In contrast, some emerging economies avoided the credit boom and had budget surpluses at the time of the crunch, subsequently coping better with the economic crisis, Professor Maurice Obstfeld of the University of California at Berkeley said.

Obstfeld’s comments followed a colourful comparison of the financial crisis with the sinking of the Titanic, made by Indian central bank deputy governor Subir Gokarn.

Speaking at the International Growth Centre’s Growth Week, which runs until tomorrow, Gokarn said that economists failed to foresee the potential severity of the crash.

Policy-makers had buffers and safety plans in place, just like the Titanic, Gokarn said. Yet the chances of experiencing such as strong shock had been considered “all but impossible”.

Back home, Indian stocks took a hit on rumours that Gokarn’s central bank is planning further monetary tightening.

Last week the Bank raised its repurchase rate yet again. Inflation in India continues to soar, touching nearly 10 per cent.