Three of the country�s most respected economists warned of a
deepening economic crisis if the banking system is not quickly
fixed, in a wide-ranging conversation with Cambridge Energy
Research Associates (CERA) Chairman Daniel Yergin and an audience
of nearly 1,000 people at CERAWeek 2009 in Houston. The full video
of this panel discussion is now available to the public at
www.cera.com, providing unique opportunity for a clear, incisive,
and in-depth understanding of the great challenges facing the U.S.
and world economy and the possible solutions.
Nouriel Roubini, professor of economics and international
business at New York University, Kenneth Rogoff, professor of
economics and public policy at Harvard University, and Nariman
Behravesh, chief economist and executive vice president for IHS
Global Insight, all agreed that this is the worst financial crisis
since the Great Depression.
Rogoff, formerly chief economist at the International Monetary
Fund (IMF), described the current recession as �a once in a 50-year
event.� He said that �2009 basically is a write-off� but added,
�I�m �constructive� about 2010 in that we�ll have tepid growth in
the world economy. It�s unusual for a recession to last more than
two years. However, it will be very slow coming out of it. The big
growth will be in some of the emerging markets. It�s the developed
countries where the biggest hurt is occurring.�
Rogoff argued that the $790 billion stimulus bill is only part
of the answer. �It�s like giving a blood transfusion while the
patient is still bleeding,� he said. �If we�re not going to fix the
banking system at the same time, then it�s just a temporary boost
in the economy. We have simply not taken the proper decisive action
with the banks.�
Roubini, also chairman of RGE Monitor, said: �Even if we have
positive growth next year, say one percent, it�s going to feel like
a recession even if we�re out of it. If we don�t get the monetary
part right, the fiscal policy right, if we don�t fix the banking
system the right way, if we don�t deal with the debt burden of the
household sector I see a one-third possibility of (an extended)
L-shaped Japanese stagnation.�
Behravesh disagreed. �This is the Great Recession, not the Great
Depression 2.0 and not Japan in the last decade,� he said. �We�re
seeing a different policy response than what we saw during the
Depression and Japan in the 1990s. It took Japan seven years to
deal with its banking crisis. The U.S. has moved in a matter of
months and it�s had some fiscal effect. Our fiscal stimulus may not
be enough or the right kind, but it�s much different than the
Depression or Japan.�
Behravesh forecasts a decline in gross domestic product for 2009
in the U.S of 2.5 to 3.0 percent and a global decline in GDP of 1.0
to 1.5 percent.
Why did people not see the vulnerability of the U.S. economy to
an economic bust? �Whenever you have an environment where there�s a
giant influx of money into your country -- and here it was coming
out of emerging markets -- it gives an illusion that things are
better than they really are,� Rogoff explained. �You lose your
judgment. At the heart of what happened is that we lost perspective
on what was real and what was really fueled by these low interest
rates, this influx of money.�
When asked by Yergin, Pulitzer Prize-winning author of The
Prize: The Epic Quest for Oil, Money and Power, (in a new, 2009
edition) about the role that oil might have played in the economic
downturn, Roubini, said: �The financial crisis would have led to a
severe downturn in oil prices anyway. I would not be surprised if
oil prices fell below $30 later this year. There could be even
further weakness in oil prices unless OPEC is able to cut
production even further.�
Behravesh, author of the recently published book Spin-Free
Economics: A No-Nonsense, Nonpartisan Guide to Today's Global
Economic Debates, pointed to China as having the ability to
maintain some economic growth which could �help oil prices get to
the $50-60 range sometime next year.� Rogoff added that oil prices
could be �shooting back up when the downturn ends and economies
grow. That�s what the historical record shows. The oil price will
rise again as the developing world grows.�
All three agreed that the economic stimulus plan is needed, but
it alone will not fix the nation�s economic problems. �If there is
not an increase in government spending then the contraction will be
more severe,� Roubini said. �However, tax cuts will not make a
difference. Last year�s tax cuts were mostly saved. Infrastructure
spending will take a long time as there are few projects �shovel
ready� so the overall impact of the stimulus may be smaller.
�People worry about the housing bust and the drop in
consumption,� he added, �but the biggest story is the drop in
capital spending. Corporations are concerned about whether they
will survive so we�re seeing a global collapse of (capital)
spending. That�s why something must be done on the stimulus side to
diminish the contraction of economic activity.�
Behravesh added that the old relationship between a
consumer-dependent U.S. and an export-dependent world would also
need to change. �There is a pent-up demand on the part of
businesses, consumers and households in terms of homes and consumer
durables. Now everybody�s scared and they�re not spending. The
question is �when does that pent-up demand get unleashed?� That
could come back very strongly. We tend to underestimate that. In
boom times, there�s a tendency to think the business cycle�s dead.
The same problem occurs in a bust � that we�ll never get out of
this.�
�There has to be a fundamental change in the debt-financed
consumer spending in the U.S. and the addiction to exports of other
countries,� he concluded.
CERA and IHS Global Insight are IHS Inc. companies (NYSE:
IHS).
About CERA (www.cera.com)
Cambridge Energy Research Associates (CERA), an IHS company, is
a leading advisor to energy companies, consumers, financial
institutions, technology providers and governments. CERA
(www.cera.com) delivers strategic knowledge and independent
analysis on energy markets, geopolitics, industry trends, and
strategy. CERA is based in Cambridge, MA, and has offices in
Bangkok, Beijing, Calgary, Dubai, Johannesburg, Mexico City,
Moscow, Mumbai, Oslo, Paris, Rio de Janeiro, San Francisco, Tokyo
and Washington, DC.
About IHS (www.ihs.com)
IHS (NYSE: IHS) is a leading global source of critical
information and insight, dedicated to providing the most complete
and trusted data and expertise. IHS product and service solutions
span four areas of information that encompass the most important
concerns facing global business today: Energy, Product Lifecycle,
Security and Environment. It serves customers ranging from
governments and multinational companies to smaller companies and
technical professionals in more than 180 countries. IHS is
celebrating its 50th anniversary in 2009 and employs approximately
3,800 people in 20 countries.
IHS is a registered trademark of IHS Inc. CERA is a registered
trademark of Cambridge Energy Research Associates, Inc. Copyright
�2009 IHS Inc. All rights reserved.
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