Saturday, January 26, 2008

US Is Worse Off Than You Think


U.S. in role of wounded giant at Davos
By Mark Landler
Published: January 23, 2008

DAVOS, Switzerland: The United States has filled various roles at the World Economic Forum over the past decade: dot-com dynamo, benevolent superpower, feared aggressor, and now, wounded giant.
On the first day of this conference, a parade of bankers, economists, and political officials expressed deep fears about the faltering American economy, peppered with blunt criticism of its institutions, chiefly the Federal Reserve, which some accused of sowing the seeds of today's crisis.
George Soros, the financier who made a fortune betting against the pound, went so far Wednesday as to say that the downturn would put an end to the long status of the dollar as the world's default currency.
"The current crisis is not only the bust that follows the housing boom," Soros said. "It's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency."
Signs of a new economic order abounded in this Swiss ski resort: the minister of commerce and industry of India, Kamal Nath, noted that China had overtaken the United States as India's largest trading partner - buttressing his view that India could largely sidestep an American recession.

The head of the National Bank of Kuwait, Ibrahim Dabdoub, said Americans who opposed sovereign wealth funds like the one run by his government needed to come to terms with the new reality.
Completing the role reversal, Nouriel Roubini, an American economist, said, "the United States looks like an emerging market," with large budget deficits and a swooning currency. By contrast, he said, Brazil, an actual emerging market, had done a better job of overhauling its economy.
Roubini, whose frequent predictions of a downturn have made him something of a soothsayer in Davos, predicted the United States would suffer a recession lasting at least a year. He foresees a flood of defaults on car loans and corporate bonds, as well as a prolonged bear market.
"The debate is not whether we're going to have a soft landing or a hard landing," he said. "The question is only how hard the hard landing will be."
Several economists said the Federal Reserve seemed to have lost control of events since the subprime crisis erupted last summer. Some criticized its steep cut in interest rates Tuesday as a knee-jerk reaction to calm the markets rather than a sound response to a deteriorating situation.
"Policy makers are reaching back into the same playbook that got us into this mess in the first place," said Stephen Roach, an economist who recently became the chairman of Morgan Stanley Asia.
By signaling that it is ready to cushion the stock market from the ravages of the credit crisis, Roach argued, the Federal Reserve risks creating conditions for a new round of inflation in asset prices.
The Federal Reserve "made bad judgments," said Joseph Stiglitz, the Nobel Prize-winning economist. "It looked the other way when investment banks packaged bad loans in non-transparent ways."
The rate cut this week, Stiglitz said, would be too little, too late, because monetary policy usually takes between six months and 18 months to be effective, and the United States is in distress now.
For all the talk here about looking at the big picture, the Davos conference is driven by short-term impulses. This week's wild swings on the markets, as well as the Federal Reserve's dramatic response, left people here spooked, perhaps exaggerating the bleakness of the mood.
Not everybody was grim. John Snow, the former Treasury Secretary and chairman of Cerberus Capital Management, said that if the United States slipped into recession, it would be "short and shallow."
"That's been the pattern of recessions in the U.S., and there's a reason for it," he said in an interview. "There is an inherent resilience in the U.S. economy. We're already seeing an adjustment."
Few Americans said the United States would resort to protectionist policies, even though it is an election year. Sovereign wealth funds, they noted, had taken multibillion-dollar stakes in Wall Street giants like Citigroup and Merrill Lynch with hardly a peep of protest in Washington.
"Open investment is a critical driver of the U.S. economy," David McCormick, the undersecretary of the Treasury for international affairs, said. He added that it was legitimate to monitor sovereign wealth funds to make sure they were commercially, not politically, driven.
The debate over decoupling - the once-popular thesis that Europe and Asia will escape the effects of a recession in the United States because they are less reliant on it as a trading partner - was over before it started.

Virtually everyone here agreed that an American downturn would inevitably spill over to Europe and Asia. Roach of Morgan Stanley said China did not have a large enough domestic consumer economy to replace the loss of demand for its exports from U.S. consumers.
Chinese officials agreed. "The Chinese economy is entering quite a delicate stage," said Yu Yongding, an economist at the Chinese Academy of Social Sciences. "We are facing a very bad situation in the U.S."
Only Nath of India said he was confident that his country would not feel a major impact from an American recession. India, he said, was far more driven than China by domestic demand.
At least one expert here professed to see a silver lining in the linkages between the world's major economies.
C. Fred Bergsten, director of the Peterson Institute for International Economics, said the more dynamic economies of China and India would lift the United States out of its downturn, rather than the United States dragging them down. Companies like IBM, General Electric and Caterpillar already depend on these countries to generate a lot of their profits, he said.

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