Opinion - Editorials   

Deepening crisis

Signals from the United States point to a bleaker economic scenario than what was projected till recently. In what is seen as a significant statement on the true state of the economy, the country’s two top economic policy makers, Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson testified before the Congress that the outlook for the economy had worsened. Both stopped short of predicting a recession but admitted that their more optimisti c forecasts of last November will have to be scaled down. Others from outside the government, including the former Federal Reserve Chairman Alan Greenspan, are less circumspect. They see an even chance of a recession setting in, although there is no agreement on when that would happen. The continuing deterioration in credit markets on the back of heavy losses in the sub-prime mortgage remains the primary concern, with its consequences increasingly felt across the whole economy. Large institutional lenders are reducing their exposures not only to the riskier categories but to their blue chip clients as well. There are many instances of credit drying up even for municipalities, students, and investment trusts holding top-rated bonds. The spiralling crisis is seen spreading to other intermediaries, such as insurance companies that have guaranteed against defaults.

The magnitude of the economic crisis is underlined by the fact that the drastic remedial policy measures undertaken so far have apparently had only a limited impact. For instance, the Federal Reserve Bank reduced its benchmark interest rate five times since September bringing it down to 3 per cent. The Fed has also pumped in enormous sums of money to shore up liquidity. Yet even the promise of lower borrowing costs has failed to reverse the negative sentiment in stock markets in the U.S. and practically everywhere else. Recently the Congress approved a large fiscal stimulus package aggregating $168 billion. Besides providing for accelerated write-offs by certain businesses, the package would provide many categories of income earners a cash rebate beginning May. It might be too early to assess its impact but initial reactions suggest that even this package may not be able to revive consumer sentiment or alleviate the concerns over the economy. It seems that only by mending the parts of the financial sector that have given way will the policy makers be able to get a handle on the crisis.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Market imperfections
Deepening crisis
From Kosovo in 1999 to Iraq in 2003
Contrasting fates of a journalist and a warlord
Cross-border deal to protect gorillas
Corrections and clarifications
The one and only Fidel
Player auction
An icon

Copyright © 2008, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu