The good, the bad and the ugly scenarios
Wolfgang Munchau
The correction is going to be more painful than conventional wisdom believes.
Martin Wolf
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How should economic policy respond to a potential fall-off in US demand?
If consumer spending declines and interest rates fall or appear likely to fall, there is the real possibility that the foreign lending to the US that has financed imports far in excess of exports will start to dry up,
leading to a combination of higher long-term interest rates and a weaker dollar.
Lawrence Summers, FT, March 26 2007
This would tend to raise inflationary pressures, transmit US weakness to the rest of the world and could, by discouraging foreign demand for US assets, lead to further downward pressure on investment in plant, equipment and commercial real estate.
It would have been desirable if policymakers had done more to restrain imprudent subprime lending to households with dubious credit in recent years. But with the sector littered with bankruptcies, this is not today’s problem. The problem is the opposite: to avoid a vicious cycle of foreclosures, declining property values, reduced consumption demand, rising unemployment, more delinquencies and more foreclosures.
While US current account adjustment is a medium-term imperative, an effort to bring it about rapidly in the face of an already declining economy could turn a soft landing into a hard one.
The writer is Charles W. Eliot, university professor at Harvard