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There are a lot of fault lines in a global economy. Just like the faults in southern California, it only takes a slight quake in one to set the others trembling as well. The credit crunch that sent the United States economy into recession has resulted in repercussions around the world.

The first signs of a world economic problem were seen in September 2008 as the near failure of AIG. the failure of Lehman Brothers and the fire sale of Washington Mutual led European bank regulators to examine the financial viability of their banks. Shortly thereafter, the Japanese banks fell under similar scrutiny. There was little good news to be found as central banks world-wide rushed to prop up newly failing banking institutions.

Banks and brokerages have shed tens of thousands of employees in an effort to survive. As lenders became more selective, the businesses that relied on credit for day to day operating funds began to suffer and lay off employees as well.

The Germans have announced the largest economic stimulus package in the EU. Japanese exports are falling and their economy has been battered by high oil and commodity prices. The Chinese economy has fallen into a recession as their exports have dropped, since the U.S. is their main trading partner.

The world economy has not yet seen the bottom of the recession. While the abrupt fall in oil prices in the last weeks of 2008 will provide some relief, economies like the Chinese do not have a safety net of small businesses to begin a recovery.

As the new President, Barack Obama will have the traditional "bully pulpit" with which to encourage the financial markets. He has asked Congress to release the second phase of bailout monies, another $350 billion. He has also publicly discussed the possibility of tax cuts and delaying the implementation of some of his most expensive programs.

The FDIC maintains a list of "troubled banks" that it believes are at risk of failure. In late December 2008, though the names were kept secret, it was widely reported to contain 171 banks. Analysts vary on the names but most of them are small banks, local or regional in size. The major United States banks that were in danger have all received bailout monies and the risk of their failure has been reduced.

The monthly unemployment rate at the end of December was 7.2%. It had skyrocketed over the last three months of 2008. The monthly unemployment rate can vary, sometimes a great deal, so one month may not be an accurate predictor of an economic problem.

Over a longer term, the monthly unemployment rate for the eight years of the Bush Presidency was 5.27%. For comparison, that same number for the eight years of the Clinton Presidency was 5.2%. Unemployment rates for blacks, Hispanics and women all averaged less during the eight Bush years than during the Clinton years.

The United States has not seen the effects of the drop in oil prices reflected in the economy. That could add $200 billion to the economy in lower prices due to lower production and transportation costs. That same benefit will appear in the European economy and that of Japan. China does not have a traditional capitalistic economy so the timing of its recovery is less predictable.

As the new President, Obama faces some difficult choices. He and his economic advisers will not know if the economy has turned the corner in the United States or world-wide until after the fact. That is the nature of economic measurements. The quandary that his administration and other world leaders face is how to provide just enough stimulus to encourage recovery but not so much as to restart inflation or create an unmanageable governmental budget deficit.

Learn more about this author, Charles Simmins.
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