Economy Live

The US sub prime mortgage market crisis has trapped all major financial investors into its snare. After the Citigroup, Goldman Sachs it is now time for Morgan Stanley to show its weakness. First time in the investment bank’s 72-year history, Morgan Stanley faced its first quarterly loss with a $9.4 billion write-down.

The bad shape of the US investor is welcome for the emerging economies of the world. To help it bail out of the crisis, Morgan Stanley is looking eastwards. It will sell $5 billion stake to the China Investment Corporation, which is under the direct control of China’s finance ministry.

Riding on the back of a booming housing market, the US financial institutions had resorted to large-scale loans to borrowers with dubious credibility. However, trade in sub-prime securities went wrong causing rise in the number of foreclosures in the USA and the banks recording huge losses. To help clear matters, the banks are looking eastwards to the emerging Asian countries. The joke that is currently popular among the Wall Street players is ‘Shanghai, Dubai, Mumbai or goodbye.’

President George W Bush presented his last budget to the nation. This is President Bush’s signature budget with the chunk of the spending being earmarked for the military in carrying out the President’s pet campaign against terrorism. The $3.1 trillion budget has not offered the ailing US economy anything special to regain its health.

The budget has emphasized more on saving with increased spending in the military sector and more tax cuts and the obvious outcome of deficit spending – more debt. The severe curtailing in government spending in health care programs will leave less money for the Medicare programs for the elderly and the Medicaid for the poor. With high premium extracted by insurance companies in the private sector, the elderly and the impoverished Americans depend on the government for health coverage.

The US economic growth is all set to slow down during the first half of 2008, as the possibility of a recession is increasingly becoming likely. This has been the projection made by a large number of economists surveyed by Blue Chip. The US economy is expected to grow at a rate of 0.1 percent in the first quarter and by 0.5 percent in the second quarter.

US economic slowdown seems to have finally hit China. China’s trade surplus unexpectedly experienced a sharp fall in February. This sudden fall was not expected given the 48% record growth in the country’s trade surplus in 2007. The gap between China’s exports and imports had expanded to $262.2 billion last year.

USA, one of the major importers of Chinese goods had accused China of keeping its domestic currency Yuan undervalued to keep Chinese exports cheap. The West has also urged China to open up its domestic economy to foreign investment and allow greater imports. The surge in 2007’s Chinese exports had occurred despite of a number of product safety issues concerning Chinese goods including toys, toothpastes and clothing items. Beijing has introduced measures such as export tax on steel and some other goods to contain excessive export growth, which it fears might overheat the Chinese economy.

Almost all of the developed nations currently are under the impact of recession of some kind or the other. And this has entailed a predominant effect on the people who exist under the identified category of a minority.

This has been a very evident situation in the United States, where the colored population and also the African-American have been undergoing the backlash in terms of credit and finance, which is being currently referred to as the ‘mortgage crisis’. Their dreams of affording a home, they can call their own has received an antagonist response from the creditors who hold and mould the economy of America.
The so called colored people and the African-Americans in particular with a low credit history are being almost being vertically hit by the ‘subprime loans’, which has led to the financial crisis of the past year. They had been given loans easily, with very less formalities, but heavy interest rates that have led to the present crisis.

Cleveland, Baltimore and Detroit have been the worst hit areas, where the majority of the colored populations have had to face the challenge of leaving their cherished homes because of their inability to provide the stipulated installments for the home loans granted to them. In lieu of the situation being redeemed, the creditors have led almost 70,000 homes to be foreclosed, which has amounted the whole scenario to be referred to as “financial apartheid” for the minority populations.

For the upcoming US elections, this seems to be a very potent issue to be taken in hand by the Democrats or Republics. It about time now that some one redeems the colored population of the United States from this prevalent apartheid.

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The Organization for Economic Cooperation and Development (OECD) had earlier warned that the Japanese economy was heading for a slow down. Proving their apprehension correct, the economic data for February shows that Japan’s unemployment rate rose for the first time in five months to 3.9 percent as companies are struggling with rising production costs and a decline in exports to the US.

For years, Japan has been fighting deflation resulting from excess production of goods. However, the economic scenario has drastically changed this year with rapid rise in consumer prices. In February, the prices of core consumer items including fresh food has recorded 1 percent increase from the price level in the previous year – the fastest rise in nearly 10 years. Most of the inflationary pressure is arising from hike in gasoline and food prices. According to Takehiro Sato, chief economist, Morgan Stanley, both the economies in the US and Japan have already entered a mini-recession that is likely to continue until around April-June quarter.

After the US financial institutions created a sub-prime lending mess by giving easy loans to unscrupulous borrowers that resulted in a credit crunch sliding the economy into recession, discussions are now underway on how to stem the current crisis. The free-market capitalist US economy is now depending largely on the federal government to lift the economy from the current recession. The pertinent question that arises is which route the government should take to resolve the crisis.

This is certainly a bad news for the whole world as employers in the U.S cut the most workers in five years last months. According to the Labor department in U.S, employment fell by 80,000 jobs in March 2008. So it is the lay offs in five years. Some economists have now convinced that the economy is in recession, but some have admitted that U.S is in its early stage of recession period. Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York, says,

There doesn’t appear to be any silver lining. It shows that we’re right in the middle of a recession, our expectation is that it will be a longer recession than the last two, and we’re just in the beginning.

In the wake of OPEC ministers coming to a decision related to increased gasoline production, the gas prices have gone up again. Consumer inflation went up steeply back in November and managed to hit a record high.

The rising gas prices hit the market during an unfortunate time - just when economic growth is on the decline. According to the Labor Department report published last Friday, the Consumer Index price went up by 0.8 percent. I think that’s a lot of increase. At the same time inflation sent the stock prices lower.

In his final State of the Union address, President George W Bush has finally acknowledged that the US economy is in rather poor shape. President Bush’s address was significant in more than one way, besides being his last such Presidential address before he leaves office in January next year, this address took place amidst his popularity touching its nadir according to a recent Gallup poll.

Despite all the niceties in his speech, it is not clear how serious was the US President in pinpointing the exact causes for the recent downturn in the US economy – a tumbling dollar, risk of large number of Americans losing their homes, mortgage market crisis, and financial market crisis. Though the President believes that the Congressional plan of pumping $150 billion, equivalent to about 1% of US GDP, will provide the much needed multiplier effect from fiscal spending the economy needs but a possibility nonetheless remains of a part of the economic gain being wiped away by US ‘surge’ strategy in Iraq.