U.S. Policies Evoke Scorn at Davos
George Soros, who made a fortune in currency trading, says the financial and economic slump gone well beyond subprime loans to denote an end of the dominance of the United States dollar. By MARK LANDLER
DAVOS, Switzerland — Over the years, the United States has fulfilled many roles at the World Economic Forum: dot-com dynamo, benevolent superpower, feared aggressor. Now add wounded giant.
On the first day of the annual conference here, a parade of bankers, economists and government officials expressed deep fears about the faltering American economy — and blunt criticism, particularly of the Federal Reserve, which some blame for sowing the seeds of today’s crisis.
For George Soros, the financier who made a fortune betting against the British pound, the slump now goes beyond subprime loans. It signals a reordering of the postwar economy and the end of dollar dominance.
“The current crisis is not only the bust that follows the housing boom,” Mr. Soros declared. “It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.”
Suggestions of a new economic order abounded here: India’s commerce and industry minister, Kamal Nath, said that China had overtaken the United States as his country’s largest trading partner, buttressing his view that India could come through an American recession unscathed.
The head of the National Bank of Kuwait, Ibrahim S. Dabdoub, said Americans who opposed sovereign wealth funds, like the one run by the Kuwaiti government, need to come to terms with the new reality.
And an American economist, Nouriel Roubini, said bluntly, “The United States looks like an emerging market,” with large deficits and a weak currency. Brazil, an actual emerging market, had done a better job overhauling its economy, he said.
Mr. Roubini, whose frequent predictions of a downturn have made him something of a soothsayer at Davos, said that the United States would suffer a recession lasting at least a year. He foresees a flood of defaults on car loans and corporate bonds, and a prolonged bear market.
“The debate is not whether we’re going to have a soft landing or a hard landing,” he said, as his audience squirmed. “The question is only how hard the hard landing will be.”
Several economists said the Federal Reserve seemed to have lost control of events since the subprime crisis erupted last summer. Some criticized its steep cut in interest rates Tuesday as a knee-jerk reaction to calm markets, rather than a reasoned response to a deteriorating situation.
“Policy makers are reaching back into the same playbook that got us into this mess,” said Stephen S. Roach, the economist recently named chairman of Morgan Stanley Asia.
Mr. Roach argued that the Fed, by signaling its readiness to cushion the stock market from the credit crisis, risked creating conditions for a new round of inflation in asset prices.
Joseph E. Stiglitz, a Nobel Prize-winning economist, said the Fed “made bad judgments” and “looked the other way when investment banks packaged bad loans in nontransparent ways.”
He said the rate cut was too little too late, because monetary policy usually takes 6 to 18 months to have an impact.
Not every one was grim. John W. Snow, the former Treasury secretary and chairman of Cerberus Capital Management, predicted that if the United States slipped into a recession, it would be “short and shallow.”
“That’s been the pattern of recessions in the U.S., and there’s a reason for it,” he said in an interview. “There is an inherent resilience in the U.S. economy.” Mr. Snow said there had already been an adjustment in housing prices and risk valuation.
Secretary of State Condoleezza Rice picked up the theme of American economic resilience, saying that President Bush and Congress were negotiating an economic stimulus package that would help the United States remain an engine of global growth.
Despite the current weakness, few Americans here said the United States would resort to protectionist policies, even though it is an election year. Sovereign wealth funds, they noted, had taken multibillion-dollar stakes in giants like Citigroup and Merrill Lynch with hardly a peep of protest in Washington.
“Open investment is a critical driver of the U.S. economy,” David H. McCormick, under secretary of the Treasury for international affairs, said. He added that it was reasonable to monitor sovereign wealth funds to make sure that they were commercially and not politically driven.
The debate over “decoupling,” a once-popular idea that Europe and Asia could escape the effects of a recession in the United States because they are less reliant on American trade, seemed to be over before it started.
Virtually everyone here agreed that an American downturn would spill over to Europe and Asia. Mr. Roach said China did not have a large enough domestic consumer market to replace a loss of demand for exports from American consumers.
Officials from China agreed. “The Chinese economy is entering quite a delicate stage,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences. “We are facing a very bad situation in the U.S.”
Only Mr. Nath of India said he was confident that his country would not feel a major effect from an American recession. India, he said, was far more driven than China by domestic demand.
At least one specialist here professed to see a silver lining in the links between the world’s major economies. C. Fred Bergsten, director of the Peterson Institute for International Economics, said China and India would lift the United States out of its downturn. Companies like I.B.M., General Electric and Caterpillar already depend on these countries for a lot of their profits, Mr. Bergsten said.
Adding a new term to the Davos lexicon, he said the United States would soon experience “reverse coupling.”
Andrew Ross Sorkin contributed reporting.
For George Soros, the financier who made a fortune betting against the British pound, the slump now goes beyond subprime loans. It signals a reordering of the postwar economy and the end of dollar dominance.
“The current crisis is not only the bust that follows the housing boom,” Mr. Soros declared. “It’s basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency.”
Suggestions of a new economic order abounded here: India’s commerce and industry minister, Kamal Nath, said that China had overtaken the United States as his country’s largest trading partner, buttressing his view that India could come through an American recession unscathed.
The head of the National Bank of Kuwait, Ibrahim S. Dabdoub, said Americans who opposed sovereign wealth funds, like the one run by the Kuwaiti government, need to come to terms with the new reality.
And an American economist, Nouriel Roubini, said bluntly, “The United States looks like an emerging market,” with large deficits and a weak currency. Brazil, an actual emerging market, had done a better job overhauling its economy, he said.
Mr. Roubini, whose frequent predictions of a downturn have made him something of a soothsayer at Davos, said that the United States would suffer a recession lasting at least a year. He foresees a flood of defaults on car loans and corporate bonds, and a prolonged bear market.
“The debate is not whether we’re going to have a soft landing or a hard landing,” he said, as his audience squirmed. “The question is only how hard the hard landing will be.”
Several economists said the Federal Reserve seemed to have lost control of events since the subprime crisis erupted last summer. Some criticized its steep cut in interest rates Tuesday as a knee-jerk reaction to calm markets, rather than a reasoned response to a deteriorating situation.
“Policy makers are reaching back into the same playbook that got us into this mess,” said Stephen S. Roach, the economist recently named chairman of Morgan Stanley Asia.
Mr. Roach argued that the Fed, by signaling its readiness to cushion the stock market from the credit crisis, risked creating conditions for a new round of inflation in asset prices.
Joseph E. Stiglitz, a Nobel Prize-winning economist, said the Fed “made bad judgments” and “looked the other way when investment banks packaged bad loans in nontransparent ways.”
He said the rate cut was too little too late, because monetary policy usually takes 6 to 18 months to have an impact.
Not every one was grim. John W. Snow, the former Treasury secretary and chairman of Cerberus Capital Management, predicted that if the United States slipped into a recession, it would be “short and shallow.”
“That’s been the pattern of recessions in the U.S., and there’s a reason for it,” he said in an interview. “There is an inherent resilience in the U.S. economy.” Mr. Snow said there had already been an adjustment in housing prices and risk valuation.
Secretary of State Condoleezza Rice picked up the theme of American economic resilience, saying that President Bush and Congress were negotiating an economic stimulus package that would help the United States remain an engine of global growth.
Despite the current weakness, few Americans here said the United States would resort to protectionist policies, even though it is an election year. Sovereign wealth funds, they noted, had taken multibillion-dollar stakes in giants like Citigroup and Merrill Lynch with hardly a peep of protest in Washington.
“Open investment is a critical driver of the U.S. economy,” David H. McCormick, under secretary of the Treasury for international affairs, said. He added that it was reasonable to monitor sovereign wealth funds to make sure that they were commercially and not politically driven.
The debate over “decoupling,” a once-popular idea that Europe and Asia could escape the effects of a recession in the United States because they are less reliant on American trade, seemed to be over before it started.
Virtually everyone here agreed that an American downturn would spill over to Europe and Asia. Mr. Roach said China did not have a large enough domestic consumer market to replace a loss of demand for exports from American consumers.
Officials from China agreed. “The Chinese economy is entering quite a delicate stage,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences. “We are facing a very bad situation in the U.S.”
Only Mr. Nath of India said he was confident that his country would not feel a major effect from an American recession. India, he said, was far more driven than China by domestic demand.
At least one specialist here professed to see a silver lining in the links between the world’s major economies. C. Fred Bergsten, director of the Peterson Institute for International Economics, said China and India would lift the United States out of its downturn. Companies like I.B.M., General Electric and Caterpillar already depend on these countries for a lot of their profits, Mr. Bergsten said.
Adding a new term to the Davos lexicon, he said the United States would soon experience “reverse coupling.”
Andrew Ross Sorkin contributed reporting.
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