| DAVOS/SWITZERLAND - Tony Blair, Prime Minister of the United Kingdom (1997-2007); Member of the Foundation Board of the World Economic Forum; Co-Chair of the World Economic Forum Annual Meeting 2008 and Condoleezza Rice, US Secretary of State captured during the Opening Plenary at the Annual Meeting 2008 of the World Economic Forum in Davos, Switzerland, January 23, 2008. |
The Federal Reserve's emergency 0.75% cut in the federal funds rate to 0.75% got a tepid response from participants on Wednesday at the opening day of the World Economic Forum in Davos, Switzerland.
In an interview with FT.com’s View from the Top, George Soros, the Hungarian-American financier accused the Fed of cutting rates in a “rather panicky way . . . because people fear there are hidden problems” which had yet to surface.
“Then there is worry about the monoline [insurers] and there may be another problem with money market funds,” he said.
Stephen Roach, Chairman, Morgan Stanley Asia,and previously longtime Chief Economist who was renowned for his bearish outlook, commented on whether the aggressive Fed cutting will work that : "The answer lies in the unique character of this recession. There are two triggers - a bursting of the US house price bubble and a bursting of the credit bubble. I do not believe that aggressive Fed rate cuts will resolve the extreme imbalance between supply and demand in the US property market that will be pushing housing prices lower for some time. Nor do I believe that recent Fed actions will restore the functioning of credit markets to their pre-crisis state. As a result, pressures are likely to remain intense on housing - and credit-dependent US consumers - a sector that accounts for a record 72% of US real GDP. "
Roach said that there will be consequences in the next recovery. "Unfortunately, the US central bank can’t seem to break out of the market-friendly trap it fell into nearly a decade ago Panicking over the possibility that yet another bubble is bursting, the Fed is once again injecting liquidity into an asset-dependent US economy. That won't arrest the recessionary dynamic now unfolding but it could well set the stage for the next asset bubble in America's bubble-prone economy. Have we learned anything from the mess of the past seven years?" Roach said.
Angel Gurría, Secretary-General of the Organisation for Economic Co-operation and Development (OECD), supported the move.
“This gives credibility to the fiscal package [of tax cuts] in the US and covers the short term while households wait for their cheques,” Gurría said after a Davos session.
C-SPAN Interview --Stimulus Package, Interest Rate Cuts, Banking Reform (Washington Journal, 8:35am, January 23, 2008)
Finfacts contributor: Professor Peter Morici
(Click on Morici link on page and player should launch)
SUMMARIES OF DISCUSSIONS ON ECONOMIC ISSUES
World Economic Brainstorming: Addressing Uncertainty
Chaired by John K. Defterios
Wednesday 23 January; 15.30 – 17.00
The global economy appears to be facing a serious downturn. The financial slide that began in the US in August with the dislocation of key credit markets and losses linked to sub-prime mortgages is continuing, with worrisome spin-off effects around the globe: soaring oil prices, higher commodity prices (particularly for food), a plunging US dollar and billions lost by banks. The US economy seems about to slide into a recession, which could be contagious. At the same time, investor and consumer confidence is in a downward spiral. Can emerging markets counter these effects? Can burgeoning sovereign wealth funds come to the rescue?
Participants at the brainstorming considered these issues, defined and voted on what posed the most serious threats to global economic growth in 2008, made suggestions as to how the threats could be addressed, and recommended which institutions and countries should take the lead. "There are mind-boggling numbers going around," said session Chair John K. Defterios, Anchor, CNN Marketplace Middle East, CNN International, United Kingdom."It looks like what we have brewing now is a perfect storm. We are in free fall, which is perhaps why the Federal Reserve took such drastic action yesterday." Defterios called on participants to help "find the light at the end of the tunnel."
At the top of the list of concerns, as indicated by the vote, is lack of coordinated response and leadership (18.5%), followed by mismanagement of the current crisis (18.1%), broad-based collapse of confidence (16.7%), US recession (11%), severe global credit crunch (11%), rise in energy and commodity prices (7.5%), overreaction to the threat of recession (7.5%), rise in protectionism (4.4%) and greater income inequalities (2.2%). Defterios called on several discussion leaders to report back and take the pulse of the room.
- "It’s too late for 2008 if we rely on traditional monetary and fiscal policy. But it’s not too late if we have a coordinated response. We need out-of-the-box macroeconomic coordination and out-of-the-box intervention in the US housing market. The biggest problem is the lack of leadership in the US."
Laura D. Tyson, Professor of Business Administration and Economics, University of California, Berkeley, USA
- "The G8 leaves the G5 out of the decision-making process at their peril. International organizations that need to take the lead are the IMF, World Bank, the OECD, WTO, ILO and specialized UN agencies. The US, Euroland and China must also do a better job. If they work together with the international organizations to identify best practice, it will be a formidable voice."
Angel Gurría, Secretary-General, Organisation for Economic Co-operation and Development (OECD), Paris
- "There is a concern that oil will go up to US$ 200 driven by geopolitical crises. This is intertwined with concern about an outbreak of protectionism, which would disrupt emerging economies. There is concern about mistrust in the US, which resonates back to the anxiety over the lack of US leadership."
C. Fred Bergsten, Director, Peterson Institute for International Economics, USA
- "Coordination on a macroeconomic policy stance is the solution. Because we do not have the coordination, the financial crisis might spill over into the real economy. Anxiety among developed countries about the effects of globalization could lead to a protectionist stance. Anxiety is the biggest medium-term threat."
Youssuf Boutros-Ghali, Minister of Finance of Egypt
- "The beginning is the risk of a credit crunch in the US and the wide implications that would have in the global economy. The likelihood is more conservative lending. Sovereign wealth funds recapitalized the US financial system, but will they encounter political resistance that will make them reluctant to continue to do so?"
Jeffrey A. Rosen, Deputy Chairman, Lazard, USA
- "The six Gulf countries are moving towards an open market, similar to that in the EU. In the next seven years, these countries will be the fifth largest economy in the world. The UAE is experiencing phenomenal growth of up to 12% per year. The Gulf will play a major role in the regional and global economy. Already, some of our institutions are investing in the US and China."
Abdul Aziz Al Ghurair, Chief Executive Officer, Mashreqbank, United Arab Emirates
Update 2008: If America Sneezes, Does the World Still Catch a Cold?
Wednesday 23 January 13.45 – 15.00
"When the US catches a cold, maybe the rest of the world catches a sniffle, but certainly not pneumonia," noted C. Fred Bergsten, Director, Peterson Institute for International Economics, USA. Bergsten contends that with emerging countries now accounting for half the world’s economy and many of these countries experiencing growth rates of 6-7%, a severe slowdown in the economies of the most developed countries would still leave the world with an annual growth rate of around 4%. "That means that the world economy is certainly not going into recession," says Bergsten. In fact, he argued that the world may experience its first episode of "reverse coupling", in which reasonably rapid growth in China and other economies softens and shortens the US downturn.
While agreeing with Bergsten on some points, Cheng Siwei,Vice-Chairman, Standing Committee, National People's Congress, People's Republic of China, said that China has three concerns about the US over the coming year:
- What will happen with the sub-prime crisis?
- What trend will the US dollar follow?
- Will US elections divert Washington’s attention from dealing seriously with economic issues?
Cheng expressed concern that the US is artificially devaluing the dollar. He added that China tried to slow its growth to 8% over the last year, but missed its mark and experienced an 11.5% growth rate. That was partly because of the increased value of Chinese euro holdings. Cheng said he opposes any pressure from Washington to increase the value of the renminbi-yuan aggressively. A too rapid rise in the renminbi-yuan’s exchange rate, he argued, would have disastrous consequences for the US and China’s neighbours.
Michael S. Klein, Chairman and Co-Chief Executive Officer, Markets and Banking, Citi, USA, also agreed with the notion of decoupling, but argued that a larger shift in the world economy is taking place. "What we are facing today are large secular trends, rather than cyclical trends," he said. "Who the driver is may be open to question, but the linkages are not."
Two major trends are the transfer of jobs from industrialized countries and the transfer of wealth to commodity countries. Oil purchases constitute a flow of US$ 4 trillion in funds per year, with US$ 2 trillion – roughly the equivalent of US net income – going to four countries each year. Klein indicated he does not see these trends changing anytime soon.
David H. McCormick, US Undersecretary of the Treasury for International Affairs, argued that the US economy has sound underlying fundamentals, although he admitted that there are clearly areas of concern that have played out over the last few weeks. The housing market downturn has turned out to be far more significant than originally believed. Sub-prime market turbulence has extended its impact beyond the US and led to a broad re-pricing and retrenchment of risk, and the increase in oil prices has constituted an incremental penalty on growth.
That said, McCormick contended that the US is still "the 800-pound gorilla" on the scene. "The US is still 20% of the global economy," he noted, "and it accounts for 30% of the world’s exports." He predicted a growing understanding and cooperation between central bankers, finance ministries, regulators and investors. "We will begin to see policy responses that are focused, targeted and, I hope, effective."