U.S. Economic Policymakers Face Decline in Assets’ Market Value
Let there be no doubt that we are not just in recession but in a systemic crisis. Many analysts still suggest that the economy can wriggle through the credit crunch without a recession, but the credit crunch is biting so strongly for the very good reason that financial institutions, notably banks, know just how many of their “assets” are declining in value or already worthless.
Martin Feldstein, who heads the National Bureau of Economic Research and is not a “liberal” in the American spectrum, in talking to an audience at the National Association for Business Economics meeting in Washington in early. He asked: Why is there some improvement in U.S. net exports? It is due to improvement in the savings-investment equilibrium being imposed by the housing correction. National saving will have to increase much more markedly to make a difference in the underlying position of the U.S. economy.
The decline of the dollar in real trade-weighted valued — down 40 percent from its long-term high — is a symptom of the overall U.S. predicament. For the U.S. economy to recover a sustainable global position, Feldstein warned, will require a painful adjustment: increased domestic savings and cutbacks in consumption and measures of wealth (such as housing).
This call for changes in personal behavior is notably absent from the rhetoric of the U.S. Feldstein’s insights about the underlying U.S. economic dynamics are rare from someone in such a prominent position. president or any of the leading presidential candidates.
Note the contrast with Europe. In refusing again this week to cut interest rates, Jean-Claude Trichet, head of the European Central Bank, said that the bank’s government council was unanimous in opposing cuts (which are being used in the U.S. to stimulate the economy). “We never underwrite market expectations,” Trichet said. “We always do what is necessary to do, what is in line with our mandate — and that is to deliver price stability in the medium term.”
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