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Experts weigh in on the global effects America's economy

Sunday, October 5, 2008 | 10:00 a.m. CDT; updated 11:12 a.m. CST, Wednesday, February 11, 2009

Stuart Loory: Secretary of Treasury Henry Paulson and Ben Bernanke of the Federal Reserve recently told United States lawmakers that if they did not approve a bailout, there might not be an economy left in this country. That worst fear has not come to pass, but the crisis remains. Housing prices continue to fall around the world. The United Kingdom is a case in point. Economies stagnate, Japan and Korea for example. In Western Europe there is scrambling over which countries should be doing what to help straighten the matters out. Were Paulson and Bernanke crying wolf?

Peter Coy, economics editor, Business Week, New York: The economy, not only in the U.S. but globally, is in a precarious condition. It takes a while for the damage in the core of the financial system to spill over to the real economy. People are putting their money into treasury bills and almost nothing else. Banks are hoarding cash and not lending funds. The Federal Reserve and other central banks' attempts to flood the economy with liquidity are not achieving their objectives. Banks feel like they need to have cash ready for emergencies. Bernanke and Paulson were not overstating matters a bit.

Loory: Is it as bad in England?

Stanley Reed, bureau chief, Business Week, London: It is behind the U.S. but heading in the same direction. Two banks were effectively rescued (last week). HBOS, the largest U.K. mortgage lender, was one. Housing prices are starting to go down. There are higher debt levels even than the U.S. Growth in the economy is flat but not in a recession yet. Unemployment levels are slightly up. Money markets in London and Europe are pretty much frozen as they are in the U.S.

Loory:  What is going on in France?

Sophie Pedder, bureau chief, The Economist, Paris: The French woke up late, they felt they weren't the ones who created the problem so would be protected from the effects. The French have high savings rates and are not indebted. There hasn't been an asset bubble here because it is hard to get a mortgage and buy property. The French have been concerned to discover they are intimately linked to the rest of the world because their banks have been borrowing and lending throughout the world, including the American mortgage market.

Loory: German economic policy has been different from other countries in the world, particularly the U.S., and has not been hit as hard, is that still so?

Greg Benzow, editor, Deutsche Welle, Bonn, Germany: The German economy is an export driven economy and has had record sales abroad. Another factor making Germany better off is the high degree of savings among private citizens. (Last week), the government came in and propped up two banks, so there has been some recent suffering. Banks are sitting on a very large amount of money and are worried to lend it to anyone. Normally, German banks keep a low three digit million figure with the central bank over night; now, they have been keeping upwards of 25 to 28 billion Euros ($34.64 billion to $38.79 billion). This has caused smaller-sized enterprises, the driving force behind the economy, to have difficulties getting money.

Loory: What is going on in Asia, particularly Japan?

Eric Burroughs, chief markets correspondent, Reuters, Tokyo:  Japan is stagnated because of the U.S. slowdown. The question is how much other economies that have kept the global economy from falling will hold up. Russia, the Middle East, and other countries that have enjoyed the oil boom, have underpinned the Japanese economy in the last six months, even as U.S. exports have declined sharply. Big manufacturers are hitting a five-year low at the same time jobless rates are at a two-year high.  It is still more of a stagnant condition rather than recession. The economy is expected to recover some and muddle along for the next year or so. The severity of the U.S. credit crisis is starting to show effects on the Japanese economy, so Japan is very worried.

Loory: How serious is what you call the real economy situation, and is the bailout going to help get us out of it?

Coy:  Jobs have been declining since the end of last year and now its worse. The Institute of Supply Management, which measures factory orders, showed August had a steep drop off consistent with a depression. September is almost certainly worse. Auto sales, which are extremely weak, are going down farther. The only good news is that inflation has slowed with falling oil prices and a lack of pricing power because of weak demand. With low inflation, the Federal Reserve has more room to cut interest rates. The rate is at two percent and could conceivably move down. That could help, but cutting interest rates in a credit crunch doesn't do much good.

Loory: Why doesn't the cut in interest rates help?

Coy: If there is no demand for money, or if the banks hoard whatever money they are able to borrow, then it never does anything to growth.

Reed: Measures to restore confidence are needed, without confidence there is going to be no money flowing in the system, no lending. The big question is whether the bailout, if it goes through, will restore confidence.

Coy: This may not solve the problem because these are not loans; they are poorly designed, complex instruments.  The government wants to buy $700 billion worth of mortgage-backed securities. Even if the government takes them over, it can't cut a deal with the homeowner to reduce the debt that he or she owes on a house. The people will still owe the same debt as they had before.

Loory:  Why is there apparently no confidence problem in Germany?

Benzow: Germany's economic growth forecast for next year is 1.2 percent. Unemployment figures released (last week) showed another jobless rate loss. The people themselves have taken a wait and see attitude.

Pedder: France has not been so calm. Unemployment has been rising; house prices started to fall in July and August, before America's deepening crisis. More than half of French lenders are expecting to tighten credit to the corporate sector.

Reed: The ECB is undermining confidence in the Euro-zone. They seem to be entirely focused on inflation and not growth. This one size fits all monetary policy of the Euro-zone is going to be tested in the next few quarters.

Benzow: That is the main problem of the ECB all along, trying to get everyone on the same page.

Loory: I read that Paulson called for help from the central banks of Europe and Europe ran off in eight different directions to help.

Reed: The ECB does not have the power of the U.S. Treasury or Federal Reserve. The worry is that if a big enough bank gets in trouble there won't be enough firepower to fix the problem.

Loory: Apparently China is the one major country in the world where the economy is not suffering. What does this mean for all of us in the future?

Burroughs: China, as the factory floor of the world, is worried. Their exporters are starting to suffer because the U.S. slowdown is becoming broader. They have already stopped letting their currency appreciate. As the engine of the global economy, it is something to keep an eye on.

Producers of Global Journalist are MU journalism graduate students Jared Gassen, Chris Hamby, Sananda Sahoo, and Hui Wang. The transcriber is Pat Kelly.


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