Saving the World

As I expected - somehow .. some heroes will come up to save the world.

Check out comment from:
Stephen Roach, Chairman, Morgan Stanley Asia

Timing is everything, I guess. No sooner had I arrived in Davos, when my Blackberry started chirping with alarms over an emergency 75 basis point Fed rate cut. No new news on the state of the US economy was evident. The only breaking development was a swoon in global equity markets that was likely to be reflected in the form of a similar plunge in the US. And so the Fed jumped into action. Borrowing a page from the market-friendly script of the Greenspan Fed, Bernanke & Co. offered up a market-friendly action of its own.

Will it work? That's undoubtedly the question that will be hotly debated this year in Davos - a question that I certainly plan to tackle at the opening session on the global economy tomorrow (Wednesday) morning.

The answer lies in the unique character of this recession. There are two triggers - a bursting of the US house price bubble and a bursting of the credit bubble. I do not believe that aggressive Fed rate cuts will resolve the extreme imbalance between supply and demand in the US property market that will be pushing housing prices lower for some time. Nor do I believe that recent Fed actions will restore the functioning of credit markets to their pre-crisis state. As a result, pressures are likely to remain intense on housing - and credit-dependent US consumers - a sector that accounts for a record 72% of US real GDP.

In essence, the Fed is "pushing on a string" here - unable to stop the recessionary dynamic now unfolding. But there will be consequences in the next recovery. Unfortunately, the US central bank can't seem to break out of the market-friendly trap it fell into nearly a decade ago Panicking over the possibility that yet another bubble is bursting, the Fed is once again injecting liquidity into an asset-dependent US economy. That won't arrest the recessionary dynamic now unfolding but it could well set the stage for the next asset bubble in America's bubble-prone economy. Have we learned anything from the mess of the past seven years?

Another piece from BBC:
Financial crises: Lessons from history
http://news.bbc.co.uk/1/hi/business/6958091.stm