Editorial: The flip side of global economy

If anyone doubted that we live in an interconnected and globalized world, the swiftness with which the financial crisis in the United States spread to the rest of the developed world should eliminate those doubts. In ordinary times a globalized world economy has more benefits than costs. When things start to go sour, however, and especially when a panic psychology takes over and buyers of financial instruments retreat to the sidelines, the virtue of financial interconnectedness becomes a curse.

Thus we have seen severe downturns not just in the United States, but in the stock markets in England, France, Germany, Brussels, China, Japan, India and elsewhere. Many Europeans want to blame it all on the United States, and insofar as banks and investment houses held bonds and financial instruments from the United States that were declining in value or for which there was no effective market - this is especially true of China - shaky financial instruments have caused some of the problems in the rest of the world. It is also true, however, that the crisis in the U.S. exposed the fact that some banks and investment banks around the world have become too highly leveraged - or too exposed to risky investments whose risks had not been properly evaluated - and that corrections were necessary.

As Esmael Adibi, who heads the Anderson Center for Economic Studies at Chapman University has said, prices for assets that have been overvalued will eventually have to stabilize, and in the process those who took unwise risks - builders, financial institutions, homebuyers who bought more house than they could really afford - will suffer. The more quickly this is allowed to happen the shorter the period of pain, but pain there will be.

Lee A. Ohanian, who teaches international economics at UCLA, told us his major worry is that the current panic will lead to bad policies.

When the government announces a new action every day and the stock market goes down the next day, the uncertainty already present growing from the subprime mortgage crisis is compounded, and ever more intrusive interventions are contemplated - which can delay and distort the necessary corrections.

Our advice to the financial ministers of the G-7 nations meeting Friday would be to compare notes, rub chins thoughtfully, try to look confident, announce that they see signs of progress due to the coordinated reduction in interest rates, praise the actions that have already been taken, assure people that plans are being drawn up to handle whatever problems remain, but it will take a while to work out the details - and do nothing.

First, do no harm.