Archive for August, 2009
A month ago – when the debate on Ben Bernanke’s potential reappointment as Fed chairman was still in its early stages – I wrote an op-ed for The New York Times supporting Bernanke’s reappointment.
This support was not unconditional. Bernanke and the Fed made many mistakes early on. They missed signs of the economic and financial tsunami and until the summer of 2007 they lagged in their policy response. As I put it:
From the Financial Times:The global economy is starting to bottom out from the worst recession and financial crisis since the Great Depression. In the fourth quarter of 2008 and first quarter of 2009 the rate at which most advanced economies were contracting was similar to the gross domestic product free-fall in the early stage of the Depression. Then, late last year, policymakers who had been behind the curve finally started to use most of the weapons in their arsenal.That effort worked and the free-fall of economic activity eased. There are three open questions now on the outlook. When will the global recession be over? What will be the shape of the economic recovery? Are there risks of a relapse?
In the last few months the world economy has been saved from a near depression. That feat has been achieved by a range of extraordinary government stimulus measures: In the U.S. and in China, and to a lesser extent in Europe, Japan and other countries, governments have pumped liquidity, slashed policy rates, cut taxes, primed demand and ring-fenced and back-stopped the financial system. All of this has worked, but it has worked at a cost. Governments have been spending and borrowing like never before. The question now is: how do they stop?
This is not a simple problem. Restore normality too soon and the risk is that a weak recovery will double dip into a second and deeper recession. Restore it too late and inflation will already be ingrained.
Economist Nouriel Roubini talks to host Guy Raz about the prospects for an economic recovery. Roubini, famously dubbed “Dr. Doom” for his pessimistic forecasts, says we may be on the upswing, but things could go south again. Roubini also praises Fed Chairman Ben Bernanke’s stewardship and has endorsed him for another term.
Where is the US and global economy headed? Last year, there were two sides to the debate. One camp argued that the recession in the US would be V-shaped—short and shallow. It would last only eight months, like the two previous recessions of 1990-1991 and 2001, and the world would decouple from the US contraction.
Others, including me, argued that given the excesses of private sector leverage (in households, financial institutions and corporate firms), this would be a U-shaped recession—long and deep. It would last about 24 months, and the world would not decouple from the US contraction.
Today, 20 months into the US recession—a recession that became global in the summer of 2008 with a massive recoupling—the V-shaped decoupling view is out the window. This is the worst US and global recession in 60 years. If the US recession were—as is most likely—to be over at the end of the year, it will have been three times as long and about fives times as deep—in terms of the cumulative decline in output—as the previous two.
Today’s consensus among economists is that the recession is already over, that the US and global economy will rapidly return to growth and that there is no risk of a relapse. Unfortunately, this new consensus could be as wrong now as the defenders of the V-shaped scenario were for the past three years.
CNBC – Roubini: Risk of Double-Dip Recession Not Quite Past Yet (Click for the Report and Video)
The world economy still risks a double-dip recession if oil prices rise toward $100 per barrel and if huge U.S. government debts frighten investors, Nouriel Roubini, professor of economics and chairman of RGE Monitor, told CNBC. [7:31]
CNBC – Dr. Doom Duel (Click here for Video)
Today we take a look at which countries have best weathered the global recession and credit crunch. All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging market economies, a relative edge. These same strengths could lead the countries we highlight below to perform better as the global recovery begins, even if their growth rates remain well below 2003-2007 trends.
What commonalities are visible among these countries? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in counter-cyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.
A couple countries in Latin America have thus far been able to weather this crisis better than their neighbors. Brazil and Peru stand out for their relatively healthy fundamentals and financial systems. Both countries have benefitted from being relatively closed economies and from having diversified export markets and products. They also took advantage of the boom years (2003-2008), reducing external vulnerabilities and increasing savings (fiscal and international reserves). By the time the crisis hit, both countries had well regulated financial systems that saved them from being contaminated by toxic assets. The fact that their domestic credit markets are at an early development stage (so consumption is not very dependent on credit) helped them shelter internal demand. Finally, these countries enjoyed strong policy credibility.
Commodities May Correct in H2:2009 Due to Excessive Chinese Stockpiling But Rise in 2010 as the Global Economy Starts a Growth Recovery
Check out the following reports from Nouriel’s speech at a mining conference in Kalgoorlie, Australia: