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12 November 2008
Noted Economist Discusses Global Financial Situation
Ask America webchat transcript, November 12
Noted economist James Barth, a Senior Finance Fellow at the Milken Institute, who was an economic appointee of Presidents Ronald Reagan and George H.W. Bush, discussed the global economic situation in a November 12 Ask America webchat.
Following is the transcript:
(begin transcript)
U.S. DEPARTMENT OF STATE
Bureau of International Information Programs
Ask America Webchat Transcript
The Global Financial Crisis: What Next?
Guest: Dr. Jim Barth, The Milken Institute
Date: November 12, 2008
Time: 16:00 GMT
Webchat Moderator [Mark]: Welcome to today's webchat! We are taking your questions now. The discussion on financial issues will begin at the top of the hour--16:00 GMT.
Webchat Moderator [Mark]: Welcome! We will begin shortly.
Webchat Moderator [Mark]: Hi everyone and welcome! Dr. Barth is online now and will begin the chat in just a moment.
Jim Barth [11:01]: I am pleased to be with you today and will try my best to answer any questions you wish to ask. Also, you can go to the Milken Institute website, www.milkeninstitute.org, and listen to a webcast by me on the financial crisis. At the same site there is a set of slides you can examine on this topic. As you know, the U.S. economy is struggling as are other economies around the world.
Webchat Moderator [Mark]: We're taking your questions now.
Question [Mukesh Williams]: Which economic model is better for the United States--Friedman's Laissez-faire capitalism or Keynesian interventionsit model of development or both?
Answer [Jim Barth]: No economic model in the real world is purely Laissez-faire capitalism or interventionist. Capitalism has been shown to contribute importantly to economic growth and development in countries. Government intervention in the form of fiscal and monetary policies has also been shown to do the same. The difficulty lies in choosing the right mix of the two approaches at the right time to promote stable and long-run growth, and this will depend upon the circumstances of individual countries.
Q [Guest]: Was there a housing price bubble in the United States and how much have prices collapsed during the crisis?
A [Jim Barth]: Slide 7 shows that over the past century, housing prices reached an all-time high in 2006. This resulted in a housing price bubble which has collapsed as shown in slide 8. Housing prices have fallen nearly 20 percent from their all-time high and are expected to fall another 10-15 percent in the coming year. Countries have to consider ways to prevent such housing price bubbles from occurring. Slide 4 shows that low interest rates led to a credit boom and a home price bubble which then burst and created a crisis.
Q [jj]: Hello Sir. What effect if any does the Chinese bailout have on the financial crisis? Also, is this the first such effort by Chinese government to assist private sector?
A [Jim Barth]: The Chinese stimulus package will indeed be beneficial not only to people in China but other countries around the world. The Chinese government has taken many actions in recent years to assist the private sector. China has been and is an important contributor to world economic growth.
Q [Guest]: How bad is the housing mortgage problem in the United States? And is it getting as bad as the Great Depression in the 1930s?
A [Jim Barth]: Slide 3 shows that of the 80 million households in the United States, only 5 million have mortgages and are behind in their payments. This represents about 9 percent of all outstanding mortgages. In contrast, during the Great Depression, about 50 percent of all mortgages were seriously behind their payments. The current unemployment is 6.5 percent, whereas during the 1930s it was 25 percent.
Q [Azzeddine El Hasnaoui]: The U.S. financial crisis has had its reverberations on both developed and developing world. So my questions is, Is the United States to blame for the global financial crisis?
A [Jim Barth]: I think it is fair to say the housing and financial crisis that began in the summer of 2007 in the United States did indeed spread to other countries around the world. However, other countries have had their own housing problems that are not directly connected to what has happened in the United States. The United States is so big economically and financially that whenever there is a problem, it will undoubtedly affect other countries given the globalization that exists.
Q [Ronald Brinn]: World Bank and IMF experts confirm trillions in illicit cash...Will the Obama Administration partner globally to seize these funds?
A [Jim Barth]: I am sure that President-elect Obama once he takes office will do everything possible in working with other countries to prevent illegal cash transfers.
Q [prateep pal]: Respected Dr. Bath are you favour of more regulatory measures for the financial institution for averting the financial crisis in near future secondly are you in favour of craeting a fedreral resrve fund by imposing levy on script transaction of any type?
A [Jim Barth]: The countries around the world will have to reconsider their current regulatory structures. As slide 12 shows, the U.S. regulatory regime is in dire need of reform. Already some countries are in the process of deciding upon a more appropriate regulatory structure that will prevent a future crisis like the one that currently exists. As regards a levy on various financial transactions to build a reserve fund in the event of financial difficulties, there are some types of voluntary funds that have already been established in countries.
Q [Rob]: Will the crisis have more negative effects on Indonesian economy?
A [Jim Barth]: Yes. The current crisis is global and therefore has negative effects on all countries, with the effects being greater in some countries than others. Countries are interconnected through trade and capital flows. This includes Indonesia because it too is connected to many other countries.
Q [Abdul salam.I.P 3]: What is ur future program in financial crisis?
A [Jim Barth]: As slide 11 shows, the five big investment banking companies were indeed highly leveraged. Only two of these companies are now independent and have become bank holding companies. The current crisis tells us that firms that have too little capital and too many assets are at serious risk of insolvency should those assets decline in value by even a relatively small amount. Financial regulatory authorities have to, therefore, reassess the appropriate amount of capital that should be required for financial institutions.
Q [Chat Guest]: How did the problem spread from the United States to so many other countries?
A [Jim Barth]: Slide 6 shows that in the United States the business model of financial institutions switched from an originate-to-hold to originate-to-distribute model. Many mortgage loans were securitized, which means that they were pooled together in securities issued that were sold around the world. Once the mortgage loans declined in value due to delinquencies and foreclosures, the securities also fell in value. This created problems for people in other countries who have purchased these securities. Securitization of home mortgages can therefore lead to problems in countries where the homes are not even located.
Q [suresh 2]: sir, what do you think would be the price range for oil in the mid term?
A [Jim Barth]: I think everybody is happy that oil prices have fallen substantially in recent months. Hopefully they will stay at their present levels if not fall further. But over time they are likely to go up again as countries resume their growth and demand more oil. Many countries, however, are trying to become less dependent upon oil.
Q [Ivan Freddi]: Hello, everyone. I speak of Brazil. Here, the Central Bank is maintaining high interest rate (13.75% year), which may even be increased. As economic policy of a country BRIC doo, do you think this view correct? Thank you for your attention. Ivan Freddi, LL.M.
A [Jim Barth]: Some countries will raise interest rates in an attempt to prevent inflation from worsening. Rapid inflation can be devastating. Countries may also raise interest rates to keep their currencies from depreciating and to retain capital.
Q [Chat Guest]: There has been lots of talks about subprime mortgages. What are they? And are they responsible for most of the problems?
A [Jim Barth]: Subprime mortgages are mortgages that are extended to less creditworthy individuals to enable more people to purchase homes. However, being less creditworthy, there are likely to be more problems with these types of mortgages. Indeed, as slide 9 shows, subprime mortgages accounted for more than 50 percent of all foreclosures in the United States since 2006. Countries therefore give serious thoughts to what level of foreclosures are appropriate relative to providing more credit for more people to purchase homes.
Q [Jyotee Singh]: While the US govt. decided to bail out Fannie, Freddie Mae & AIG what was the reason that it did not save Lehman Brothers?
A [Jim Barth]: The government apparently thought that Lehman Brothers was not too big or too interconnected to be bailed out. However, it is not clear why the government bailed out Bear Stearns but not Lehman Brothers. In hindsight, it is not clear it was the best decision.
Q [suresh 2]: what do you think would be the crucial outcome of upcoming G20 meet?
A [Jim Barth]: I think it is a good idea for these countries to meet and begin a dialogue as to how joint efforts can be made to avoid a serious global economic downturn.
Q [ricy]: How do you strengthen thr lower class economic in thi crisiss
A [Jim Barth]: Countries need to have safety nets that protect lower income individuals and those that lose their jobs during a crisis. Some countries may also need additional funds from international agencies and more developed countries in times of crisis.
Q [Chat Guest]: What has been the damage from the crisis thus far?
A [Jim Barth]: Slide 10 shows the worldwide affect of the crisis through September 30, 2008 has been cumulative losses/write-downs of $633 billion, capital raised of $408 billion and number of jobs cut of 128,866. Things are still getting worse, and that is why countries everywhere are taking steps to deal with the crisis, including coordinating their efforts in some cases.
Q [Josephs]: Will US bail car companies? Do you think its a good idea? The slideshow is really good!
A [Jim Barth]: In general, bailouts are not good. However, there are times when some companies may have to be bailed out to prevent more serious widespread damage to the economy. I am however concerned that the bail outs may be extended to too many companies outside the financial sector.
Thanks, Joseph.
Webchat Moderator [Mark]: If you are just joining us, welcome! Please be sure to scroll through the slide show. And please vote in our poll!
Q [smarttoh]: US President elect Barck Obama has his work cut out for him, but his connection to Africa can not be overlooked. Africa at the moment is battling alot of issues and one wonders just what kind of policy formulation will he adapt to assist the continent given his connection with Africa?
A [Jim Barth]: I am sure President-elect Obama will be giving careful thoughts to the policies he wishes to put in place with respect to such important continent like Africa.
Q [Josephs]: How will new administration handle economy?
A [Jim Barth]: President-elect Obama will have his hands full once he takes office. I am sure he will do everything he can to help speed the recovery.
Q [suresh 3]: what is your outlook for India?
A [Jim Barth]: India has been growing rapidly in recent years, and has been an important contributor to world economic growth. Indeed, the outlook for India is currently better than for the United States in the near term.
Q [Marek]: What impact will problems in U.S. have on Middle East?
A [Jim Barth]: U.S. financial crisis is affecting the Middle East as well as other parts of the world. The demand for oil has declined, and that has had an adverse impact on oil revenues with a decrease in oil prices.
Q [Abdul]: How will you address the devastations/caos of some countries like Somalia and the notion that USA foriegn policy is mainly to blame??
A [Jim Barth]: All countries should attempt whenever possible to assist one another in various ways to help alleviate poverty and other serious problems wherever they exist. I am not however an expert on the U.S. foreign policy.
Q [Webchat Moderator (Mark)]: Dr. Barth, when do you think things will get better in the United States?
A [Jim Barth]: The government is already talking about an additional stimulus package to help the economy. The economy is likely to start improving in the middle of 2009 given all the current available information. Housing prices are still declining in parts of the country and foreclosures are still increasing. Things should improve significantly once prices bottom out and foreclosures start diminishing.
Webchat Moderator [Mark]: As we wait for the next answer, let me welcome those of you who joined the chat in progress. We continue to take your questions.
Q [suresh 3]: Do you really think that President -elect Obama will prune outsourcing to protect jobs in US?
Webchat Moderator [Mark]: Visit our CONX online community at http://co-nx.state.gov.
A [Jim Barth]: I hope President-elect Obama will work with other countries in trying to reduce barriers to trade and not unduly try to protect jobs in the United States. Of course, individuals that lose their jobs because they are no longer competitive with workers from other countries should be assisted.
Jim Barth: You are asking very good questions. Don’t forget, if you wish, to go to the Milken Institute website www.milkeninstitute.org for more information about the research of my colleagues and myself. You can also Google my name to obtain copies of some of my research papers.
Webchat Moderator [Mark]: If you would like to be added to our CONX newsletter, please write to: conx@state.gov
Q [suresh 3]: dont you think that at this point in time, governments across the world should invest more in developing infrastructure to stimulate economy?
A [Jim Barth]: Yes. Countries do indeed need to develop an infrastructure, which is crucial to economic growth and development. The U.S. and China, for example, are planning on doing just that.
Webchat Moderator [Mark]: As we approach the end of our 60-minute chat, please send in your final questions. Thank you!
Q [sandra Carvajal]: Hi, I am from Colombia...We are expecting big changes in our economy because of the new President-elect Obama perceptions about our country. In the international view, What do you think about the relationship between Uribe (colombia´s president) and Obama?.
A [Jim Barth]: Thanks, Sandra. Colombia is a close neighbor of the United States. President-elect Obama, I am sure, will wish to establish good ties with Colombia and other Latin American countries.
Q [suresh 3]: what are you think are the three critical measures should US take to bail out the current crisis
A [Jim Barth]: The U.S. should help promote the recapitalization of financial institutions, more credit available, and sufficient liquidity to assist in the economic recovery. It also should help address the foreclosure problem in coordination with the private sector.
Webchat Moderator [Mark]: Just a quick reminder. Immediately following today's chat, this site will begin to accept your thoughts and comments for President-elect Obama. We will host an open, global forum here on this URL, tomorrow, November 13 beginning at 1300 GMT.
Webchat Moderator [Mark]: The next question will be our last one for today.
Q [sandra Carvajal]: Yes, but based on Uribe reactions we can notice that our economy will have a difficult economy situation!!!, so, Can it affect the big and middle sizes company in their exportations?
A [Jim Barth]: Many countries are experiencing economic difficulties. The important thing is for countries to take appropriate steps to improve the functioning of their financial sectors that are also important in providing funding for all types of companies, including those in the export sector. As you know, countries benefit from both imports and exports. Even the United States has recently seen its exports increase and thereby help offset other weaker sectors.
Jim Barth: Thanks very much to all of you for participating in this webchat. I hope I have helped you better understand some of the issues related to the current financial crisis. Thanks also to Mark for moderating this webchat.
Webchat Moderator [Mark]: America.gov has a number of articles that may be of interest to today's chat guests:
A Year of Financial Firsts (photo gallery) http://www.america.gov/multimedia/photogallery.html#/4110/financial_firsts/
World Reacts to Election of Barack Obama http://www.america.gov/multimedia/photogallery.html#/4110/elect_08/
Webchat Moderator [Mark]: We want to thank Dr. Barth for joining us today and thank you all for your questions! A transcript of today's discussion will be posted shortly. Please visit our online community at http://co-nx.state.gov and thanks again for your participation.
Additional resources can be found on America.gov at http://fpolicy.america.gov/fpolicy/econ/index.html. Please scroll down, on the left, to “featured series” – there you will see all the related articles including one about the upcoming financial summit in Washington (November 14-15).
(Guests are chosen for their expertise. The views expressed by guests are their own and do not necessarily reflect those of the U.S. Department of State.)
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