• 
• 

Published on March 24, 2008

The blow-out in the United States, the world's largest economy, shows the spectacular and often excessive global boom has come to an ugly end.

Before the sub-prime crisis broke last August, many observers had become apprehensive about the heady US real-estate bubble.

The more optimistic ones actually believed the US could manage a soft landing for the problem and that adverse consequence would be minimal.

They had faith that the US Federal Reserve, once guided by Alan Greenspan, could once again steer the economy out of another messy affair.

That, of course, proved not to be the case at all.

"The current magnitude of devastation is second only to the classic Great Depression of the 1930s," said Teerana Bhongmakapat, a professor of economics at Chulalongkorn University.

Now critics are beginning to blame Greenspan for much of the credit crisis today.

"Greenspan kept interest rates far too low for far too long. He had cut the Fed fund rate during the wake of the 9/11 terrorist attacks to restore confidence" said Teerana.

The unusually low rate encouraged unproductive, often risky, investment practices and excessive consumption, he added.

Greenspan's missteps provide a lesson for policy-makers worldwide who want to boost economic growth by keeping rates low and injecting far too much money supply into the market, he said.

Monetary and expansionary fiscal policies just speed up consumer spending. The prudent move would be to allow consumers to buy more after they have already made and saved sufficient income.

A premature consumption binge can initially bring growth but it carries a heavy price, Teerana said.

At a later point, after consumers have bought a home and a car, it would not be reasonable to expect them to continue buying more big-ticket items to boost growth further.

Worse, when consumers find their expectations of higher income are not forthcoming, they would find it tough to service debts that had been incurred on the assumption they are becoming wealthier by the day.

When interest rates start to rise, many such consumers are forced to default on mortgage loans that they cannot repay.

As more mortgage lenders sink under the weight of such bad loans, the size of the crisis balloons until the financial system faces a meltdown.

"Too much easy money was injected into the market by the US government who were only hoping for short-term gains," warned Teerana.

Governments must take a longer-term view and refrain from going too far when they launch an economic stimulus plan, he added.

Somchai Jitsuchon, economic research director at the Thailand Development Research Institute, said Greenspan's mistake was that he tried to prolong a cycle of high growth. In turn, he was nurturing an economic bubble.

Greenspan believed in studies that suggested the US economy was driven by high productivity growth. In theory, high productivity growth is a good sign because it assumes high growth can be sustained.

"Fooled by such statistics, Greenspan failed to raise the policy rate earlier on," said Somchai.

Many central banks in Asia also indulged in spoiling the US consumer further by buying and hoarding US dollars for reinvesting in US assets.

They were, in fact, pumping yet more cash into an already overheated, liquidity-flooded US economy.

Economists warned in advance against such imbalances in the world economy when Asia was experiencing a high trade and current-account surplus with the US, while America was incurring large deficits.

Washington made an unsuccessful effort to persuade Asian countries to appreciate their currencies against the greenback in order to correct the imbalance. But as most Asian economies rely on exporting to the US, they were reluctant to do so, preferring to keep them undervalued.

Buying US dollars in the foreign-exchange market was regarded as a rule for many Asian central bankers.

"Now you know how badly Americans are spending our money," economist Ammar Siamwalla said recently.

Many analysts expect Thailand and the rest of Asia to face a slowdown in exports. The fear is that a US recession will drag down the world economy.

The government is attempting to reverse the slump here with plans to boost growth using fiscal measures, state-bank loans and mega-infrastructure spending.

The packages seem to be reasonable in the current circumstances. So long as Surapong and other ministers do not overdo it, the plan could shelter the country from the fiscal storm brewing outside.

But there are signs of troubles already emerging in the Small and Medium Enterprise Development Bank of Thailand, which had suffered from a high level of bad debts and fraud.

The root cause of the problem is believed to be linked to another easy-money scheme that was promoted by the former Thaksin Shinawatra government, where state banks were told to lend to people, many of whom could not really afford to repay the loans.

This is just like the US sub-prime case, where cheap loans were extended to people who had no business taking them on.

The solution, Ammar offers, "is to keep the hands of politicians out of the banks".

Wichit Chaitrong

The Nation