U.S. exports economic problems

Sunday, July 20, 2008 | 10:00 a.m. CDT; updated 4:58 p.m. CDT, Tuesday, July 22, 2008

Loory: The credit market crisis in the United States is of major concern. Public opinion polls say the economy is a bigger issue in the U.S. than the wars in Iraq or Afghanistan. Housing prices are going down; inflation rates are going up. The number of homeowners unable to make payments on adjustable rate mortgages is increasing. Unemployment is rising. The economic problems afflicting the U.S. are also showing up in the United Kingdom, Spain, Australia and Ireland. What impact are the Federal Reserve’s plans to bail out mortgage industry giants Fannie Mae and Freddie Mac going to have on the housing market in the U.S. and on other countries that invest in those organizations?

Gus Faucher, director of macroeconomics, Moody’s, Westchester, Pa: Fannie Mae and Freddie Mac have been important sources of capital for the U.S. housing market. The Federal Reserve and the Treasury Department decided if they couldn’t supply that capital, there would be a much steeper drop in the housing market and further cutbacks in home building, which would send the economy into a deep recession. They decided to provide capital to Fannie Mae and Freddie Mac until the federal government can come up with a permanent solution. There would have been a more severe problem if they hadn’t stepped in.

Loory: How is the Russian economy doing?

Matthew Chance, senior international correspondent, CNN, Moscow: Russian state coffers have been overflowing, particularly from Russia’s newly found energy wealth. Russia is one of the biggest oil producers in the world, so as the world economies suffer the rising oil prices, Russia is one of the few that benefits. It is putting that windfall of cash in its stabilization fund to spend on projects later, and it is investing it in other foreign utilities.

Loory: Housing prices are going sky-high in Moscow and in other large Russian cities. How do people afford those prices?

Chance: Russia is in a boom-time economy, particularly in cities like Moscow and St. Petersburg. Vast oil and gas wealth is trickling down to the general economy, and lots of individuals have spare cash to spend. That hasn’t changed because of the credit crunch. As a result, property prices in Moscow are getting more expensive. It may well be the most expensive city in the world for real estate, and that doesn’t seem likely to end soon.

Loory: Is there a credit crunch in Australia also?

Tim Colebatch, economics editor, The Age, Canberra, Australia: Yes, and no one is sure whether it’s going to end with a recession, or with a period of growth in which borrowing is replaced by thrift. Australia has had a buoyant economy fueled by debt, particularly from overseas. Housing prices rose to a point where the average Australian could no longer afford the average home. Australia wasn’t affected much by the subprime crisis because little Australian money was invested in U.S. subprime mortgages. However, because of fluctuations in financial markets, Australian banks were unable to access global markets cheaply, and they became squeezed to finance. Because of the rise in food and oil prices, the central bank became concerned about inflation and interest rates went up. In Australia, interest rates on mortgages fluctuate all the time. So when interest rates rise or lower, mortgage rates rise and fall also. Housing prices have started to fall a little after rising a lot.

Loory: How has France escaped this problem?

Adam Plowright, an English language service editor, Agence France-Presse, Paris: France hasn’t entirely escaped the problem. A lot of French banks have found themselves exposed to the collapse in the subprime market, and a number have recapitalized. Some of the economic optimism that occurred following President Nicolas Sarkozy’s election has frittered away. The government now is forecasting growth of about 1.7 to 2 percent, which, in the current climate, isn’t so bad. Also, optimism that Europe would escape the worst of the U.S. downturn has turned to pessimism, as hard economic data has shown the Eurozone to be heading down quickly.

Loory: What about in the U.K.?

Plowright: The U.K. is one of the Western Europe countries most at risk. Ireland, Spain and the U.K. had incredible booms in housing, construction and prices for existing homes. Now, house prices are falling in all three countries. That affects consumer spending, which is extremely important. Falling confidence obviously bodes badly for the economy as a whole. There also has been a tightening among banks that are reluctant to lend for new mortgages and consumer loans. Loans for consumers wanting to build a new house are increasingly difficult to get. The tying of bank lending has restricted credit for consumers and for lenders, too.

Loory: How great has the drop in housing prices been in London and in Ireland?

Plowright: London is more insulated from the housing market decline than the rest of the U.K. As an international financial city, it draws wealthy individuals who work in financial services, which helps sustain property in London. Ireland has been one of the European Union’s biggest success stories. Huge amounts of European money came into the country to invest its infrastructure. At the same time the government was going to liberalize the economy, a huge number of policies were to spur growth. Construction on the housing market has fueled much of that. Most people expected the Irish housing market would go into a downturn, given the run up in prices. Now that seems to be the case.

Loory: What effect will economic problems in the U.S. have on other economies?

Faucher: The weak U.S. dollar is making exports to the U.S. more expensive, but it is boosting U.S. exports overseas. That’s weighing on other countries while it’s helping to support the U.S. economy. The Fannie Mae and Freddie Mac problems have led to falling stock prices elsewhere. There is concern that if the U.S. goes down, it could take the global economy along with it.

Loory: Could there be a worldwide recession?

Faucher: The current problems are of great concern, but they aren’t that serious. The loss numbers aren’t that big. The problem is that risk has become so defused that nobody knows where the losses are. People didn’t realize how exposed they were on the mortgage market. Banks are reluctant to deal with one another and to lend, and that is causing problems throughout the broader economy.

Loory: What is the importance of the drop in the dollar globally?

Plowright: The euro rivals the dollar as the currency of choice for central banks for keeping their reserves. The tendency to take the euro in preference to the dollar is accelerated by the fall in the dollar in the last 12 months to two years. Consumers who see the dollar constantly falling are more inclined to see the euro as the currency of exchange.

Loory: What will improve U.S. markets?

Faucher: To see an improvement in U.S. markets, we’ll need to see indications that growth is picking up. We think the U.S. is in a recession now, but we’re going to see sustained economic growth in the U.S. and that will be dependent on an expanding global economy also.

Producers of Global Journalist are MU journalism graduate students Jared Gassen, Eunjung Kim and Catherine Wolf. The transcriber is Pat Kelley.

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