When the U.S. subprime mortgage crisis will come to an end, and when U.S. economy will phase out its crisis? It seems that no one can give the definite, exact answers to these questions. As “onlookers”, Norbert Walter, the chief economist of Deutsche Bank, and his German peers deem that U.S. economy could possibly rid itself of the shadow of subprime crisis at least by 2010 and U.S. economy could perhaps take 10 years or even longer to recover.
U.S. economy had undergone a period of stagnation in the early 1970s due to implications of the Vietnam War from 1962 to 1975. A Japanese financial crisis erupted in 1990 with deteriorating financial and housing markets, and Germany's real estate bubbles burst in 1995. These crises have brought a decade-long depression or recession to the top three global economies. As compared with Japan and Germany, the United States currently has a quite different situation.
First, Japan and Germany are two great export powers with a huge annual trade surplus either today or at the outbreak of earlier housing market or financial crises, but the entity of U.S. economy, however, has been shrinking with a large trade deficit and slack consumption under the impact of the subprime crisis. Second, as against a much higher savings rate among Japanese and German nationals and a normal managerial basis for their banking systems, the U.S. has a low savings rate and its banking industry is short of a solid managerial basis to cope with the crisis and, thirdly, German's credit crunch of 1995 was related mainly to open-end real estate credit in its banking sector and other financial spheres remained relatively robust, whereas the present U.S. financial crisis not only results in a housing credit default but affects the immense consumption credit and derivatives markets, so that the entire financial setup is plunged into the crisis.
To judge rescue measures so far taken by the American and European governments to help resolve the ongoing financial crisis, the bailout plans that have been tabled are merely “a drop in the bucket”. Since the early 1990s when the asset bubble burst in Japan, its government adopted the “zero interest rate policy” from April 1999. Then, Japan owned ample foreign reserves with huge saving deposits, issued treasury bonds or national debts, and injected into the market with huge sums of money.
In contrast, the 700 billion US dollar bailout plan submitted by the U.S. government in late September is only equal to five percent of the U.S.' GDP in 2007; the subprime mortgage loan alone in the U.S. has exceeded 700 billion dollars and, because the housing price kept falling after the burst of real estate bubbles and the shortfall for the subprime crisis became “bottomless”, there is an ensuing rising credit default, and bigger, greater losses have inflicted upon the entire credit derivative market. The bailout funds prepared by the American and European governments are perhaps far from enough to date; although Germany has also provided as much as 500 billion euros ($681 billion) in loan guarantee and capital to bolster the banking system, this sum of money is merely equivalent to 20 percent of its GDP in 2007.
Skyrocketing war expenditure poses a vital factor contributing to the U.S. inability to handle the crisis, acknowledged some German critics. Meanwhile, the winner of the 2001 Nobel Prize in Economics, Josph E. Stiglitz of Columbia University, U.S., noted in his book titled “The Three Billion Dollar War” that U.S. appropriations to the wars in Iraq and Afghanistan could reach 845 billion dollars at the end of fiscal year 2008, far exceeding its costs in the Vietnam War of 1962 to 1975.
Moreover, according to estimates made by the House Budget Committee, the total spending of the United States on the wars in Iraq and Afghanistan could reach 1.2 to 1.7 trillion dollars by 2017, whereas Joseph Stiglitz raised this figure to anywhere from 1.7 to 2.7 trillion dollars. And the record 455-billion-dollar financial deficit released by the U.S. government lately has indicated that the U.S is incapable of "turning the tide" with its rescue endeavor. The subprime crisis is by no means “inferior” or less serious to the period of stagnation in the 1970s in terms of the duration and gravity, and, consequently, the road for U.S. economic recovery cannot be a brief, short course.
By People's Daily Online and contributed by PD resident reporter in Germany Lu Hong
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