No quick rebound for Asian markets
It’ll take a while for US sub-prime mortgage market to untangle : Stiglitz
By NANDE KHIN
(SINGAPORE) Asian financial markets are unlikely to recover quickly from recent turbulence, as the mess in the US sub-prime mortgage market will take a while to untangle, Nobel laureate economist Joseph Stiglitz says. But another Asian financial crisis is not likely because Asian economies are now protected by huge reserves.
Prof Stiglitz: A global reserve currency will get rid of ‘deficits hot potato’
After a 115.95-point beating on Wednesday, the Straits Times Index showed little sign of recovering yesterday. It gained just 3.75 points to end at 3,435.46.
Speaking on the sidelines of the Singapore Economic Review Conference yesterday, Prof Stiglitz said market jitters in Asia are ‘indicative of a lot of fragility in global financial markets, a lot of queasiness and instability’.
‘And you never can tell which of those will be the critical one. That is to say, the market could recover and go another two or three months - and (then) another event happens.’
Of this week’s tumble, he said: ‘The problems that are being uncovered in the US sub-prime market are sufficiently deep that we won’t quickly recover from this one.’
He added that risk premiums have been unusually low for a long time, ‘particularly for a world in which there are a lot of risks’. Those premiums have now risen rapidly, triggered by the unravelling of the US sub-prime market. They are likely to rise further as investors take cover. ‘And that, of course, would mean significant asset price adjustments.’
Prof Stiglitz is one of the best-known economists of his generation. He was chief economist and senior vice-president of the World Bank from 1997-2000 and chairman of the Council of Economic Advisers during the Clinton Administration. He now teaches at Columbia University.
Anxiety over the US housing market has been at the core of recent volatility in global financial markets, he said. And the worst is not over.
‘I do think that weaknesses in the American economy are going to continue, (and) could get worse,’ he said. ‘The first quarter for the US was very weak, the second quarter was a little stronger, but I think we are going to go back into a weak US economy, and I think that that will inevitably have some effect on Asia.’
On the positive side, Prof Stiglitz does not see another financial crisis ripping through Asia - a point he made in his keynote address to the conference.
Despite unusually low risk premiums and there not having been any fundamental change in the global financial architecture since the 1997 Asian financial crisis, a repeat is unlikely because Asian countries in general are now protected by large reserves.
Fewer countries are also running large current account deficits and more are borrowing in their own currency instead of US dollars, he said. But risks to financial stability remain, such as global imbalances.
Prof Stiglitz said a global reserve currency, rather than a revaluation of the Chinese yuan, is the key to getting rid of the ‘hot potato of deficits’.
The US-dollar reserve system is at the root of the the US running a huge trade deficit of US$850 billion, according to him.
When countries buy US Treasury bills to keep as reserves, they are essentially lending money to the US at very low interest rates and financing US consumption, he said.
The UK had a similar trade deficit problem in the past when sterling was used as the reserve currency, he pointed out.
This ‘hot potato of deficits’ means that whichever country’s currency is used as the reserve currency, that country will run a trade deficit.
Such a system is unsustainable, Prof Stiglitz said. Already the US-dollar reserve system is ‘fraying’ as lack of confidence in the greenback grows.
He proposed that a global reserve currency be issued in an amount commensurate with reserves accumulation, which would ‘offset the negative effect on aggregate demand and money being buried in the ground, and would thus not be inflationary’.
This would also enhance global financial stability because it would do away with the risk of one country running a huge trade deficit, he said.
Source : Business Times - 03 Aug 2007
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