Another credit bubble will only provide borrowed time

Doha: The world is looking forward to the G20 meeting to provide clarity on how to proceed in the current economic crisis. A broad and comprehensive plan is expected from the most powerful governments to help lift the global economy out of recession.

However, there are serious limitations for what can be done and fundamental disagreements might mean a symbolic rather than a substantive agreement.

The world economy is far less global than is presumed and in times of crisis country interests always take centre stage.

The US and UK want bigger rescue packages to drive up demand as trade is declining and consumers save due to uncertainty.

Spending programmes from both governments have already been announced and more are sure to come. US President Barack Obama has gone ahead with his plans for investing in education and health and has announced construction projects to drive economic growth.

British Prime Minister Gordon Brown has opted for a similar approach believing the current economic crisis is due to a liquidity problem and that by lowering interest rates and making loans easily available consumers will start spending again.

Mainland European countries such as France and Germany see things differently. President Sarkozy believes more regulation rather than more spending is required as the heavily unregulated trading and lending bankrupted major financial institutions.

The $700-billion (Dh2.6 trillion) Chinese spending programme includes over $300 billion that they had already planned to spend this year. They are in a better economic position than others due to their cautious spending and the largest reserves of foreign currency worldwide.

Before the financial crisis outbreak, the Americans have been asking the Chin-ese to buy more US goods to no avail. Their economy has until now managed to wither the worst effects of the financial crisis but the government is worried about an increasing number of protests from unemployed workers.

The G20 meeting has been hyped as the new Breton Woods to lift the world out of problems. But there is a large difference between 1944 and now. In 1944 the meeting lasted three weeks while the G20 meeting will last one day.

Obama has until now only managed to fill 1 out of 120 top jobs at the US treasury, so it's highly unlikely that Treasury Secretary Tim Geitner can negotiate something substantial. Brown is in a similar situation in the sense that the Chancellor of the Exchequer and the Governor of the Bank of England do not agree with his stance .

The reality is that with such high levels of debt what the US and UK governments are actually proposing is to create another credit bubble and provide consumers with the money to live on borrowed times once again.

But even if governments provide large amounts of credit at close to 0 per cent interest rate, why should banks lend? How can over-burdened consumers in the UK and US meet payments, when record numbers are already defaulting now?

Let's hope the G20 meeting will yield some honest results and not try to sell us the same hopes that have brought us to where we are now. Governments are here to facilitate business and consumption rather than encourage recklessness. We are in a recession and it must be tackled head on and not with another credit bubble. It's usually the person who offers the easiest way out who'll lead you off a cliff.

Mohammad Fathi is an economist at Manchester Metropolitan University.