Ben Bernanke, the Fed chief some now blame for single-handedly destroying the US economy and global financial system, now sees the light at the end of the tunnel. But Andy Xie, an economist in Shanghai where that light is supposed to be shining, opens his latest missive with this cheery observation: "The global economy is sinking into the abyss." Whom do you believe? Nomura has joined Nouriel Roubini in concluding that the entire Western banking system is insolvent, leaving banks in Asia and other current-account surplus countries to pick up the pieces. That latest surge in stock prices? A sucker's rally, Prof Roubini says.
The overriding concern now is that global governments, in trying to soften the impact of the recession on employment with massive fiscal spending, will become so heavily indebted that they go bust and/or money becomes virtually worthless. China, for example, has voiced concerns that its US dollar-denominated reserves will go up in smoke if Obama keeps borrowing to pay for fiscal stimulus. More economists of the take-the-pain ilk are re-emerging to scold policymakers for trying to bail out financial systems that they argue must be allowed to fail. You may remember these guys: they were around in the early phases of the crisis and then got steamrollered by the passage of TARP and other big bank rescues. As it became clear that the real economy was falling victim to the credit crisis and their colleagues (and some of them) were losing their jobs, they went somewhat quiet. No more.
It seems cheap political capital to take up the fiscal conservatism cudgel when popular politics dictates that governments borrow to save their constituents from financial ruin. Germany at least appears to be betting that the crisis is a passing ailment and that there is no need to toss out fiscal responsibility as part of the treatment. I suspect that the German public may eventually disagree as greater generosity across the border draws stark comparisons with Germany's relative austerity.
The solution seems to be in co-ordinated fiscal action and financial restructuring so that one nation's solutions don't come at the expense of their neighbours. The Federation of GCC Chambers of Commerce is on the right track, therefore, in calling for a regional response. That is exactly what is happening, Sheikh Khalifa, President of the UAE, said in an interview yesterday in which he dismissed rumours that the emirate of Abu Dhabi would help the emirate of Dubai cope with the credit crunch by buying Dubai assets. Any assistance, he suggested would come from the federal government, rather than from one emirate to another. "There were misinterpretations of the relationship between emirates, who are members in the UAE federation," the Sheikh Khalifa said. "We are members in one entity and parts in one strong, coherent body."
UAE property executives have put a name to the notion among bankers and economists that the country needs an agency to unload loans from the country's overextended banks: a Fannie Mae for the UAE. As both a mortgage lender of last resort and buyer of banks' home loans, the FNMA stimulates home credit in the US. It and Freddie Mac blew up by buying up subprime mortgages, so setting something like that up here might be controversial. But if the lessons of the US subprime market were put to use and better supervision imposed, a UAE Fannie Mae could help thaw the property market and enable banks to start lending again by reducing their loan-deposit ratios.
Whatever. Punditry and its alter-ego, fantasy, are now one of the few growth industries, other than corporate law debt restructuring, bankruptcy and distressed asset investment. Lawyers in the UAE apparently earn more than their peers anywhere else. That can't be good. firstname.lastname@example.org