Aug 19 2007
US Treasury Secretary says growth will be hit by financial crisis
So far the US authorities have stood together - the Treasury and the Fed. They both want to lower the debt mountain. The Treasury knows this will be painful, and accepts that it will mean slower growth - fewer jobs and less business success.
This coming week will be interesting. Will the Fed decide it has done enough without lowering the Fed funds rate - and therefore the mortgage rate - or will it decide that without a proper interest rate cut the impact on the real economy may be too great?
It’s a game of chicken between the markets and the Fed, which will have serious consequences for all of us. If the Fed remains too tough for too long the US will catch a cold which will spread across the Atlantic.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
The market has to be able to expand and contract naturally in line with market forces. The debt has to be ironed out and if that means screwing the lid on growth so be it. In the long term the specter of inflation is far more troublesome than a transient downturn in the economy. There can be no doubt that the problems stemming from the sub-prime crisis are going to be felt worldwide, including the UK, and this will compound with our own debt-fuelled economy. Central banks must step back and allow events to unfold. The attemps to artificially manage liquidity will faciliate inflation in the long-term.
I think there is an interesting ‘compare and contrast’ situation between health and safety law and the subprime problem. Risk aversion, failure to apply common sense and greed and vested interests by health and safety professionals lead to illogical and sometimes idiotic decision-making that inevitably costs the consumer more money.
Institutionalised risk-aversion in the financial sector, failure to apply common sense and the greed of mortgage salesmen have led to what is obviously an bad idea (i.e. allowing packaging up dodgy mortgages as CDO’s and credit derivatives and building up these mountains of dodgy debt to the point that banks are too paranoid to lend money to each other) that will inevitably cost the consumer more money.
I think that in order to learn from this the financial sector and their regulators have to sit down and discuss the issues of risk, the spreading of risk through all these credit derivatives, responsible lending and the creation of a desirable level playing field that facilitates free trade but punishes recklessness.
It’s all well and good spreading the risk throughout the globalised markets, but if no-one seems to know what the consequences regarding the overall risk to the world economy are the whole thing just becomes a joke. I’m no economist or financial expert, but I read what the economists and financial experts are saying. They seem to disagree with each other about what is going to happen.
I refer to my comments a few weeks ago that predicted in the long run that there will be inflationary pressures from rising energy prices and a weakening
The consequences are being felt far from the US. Here in Thailand the impact of events in the United States is being felt in the economy, and that’s just part of globalization.