The Global Recession, Graded on a Curve
By FLOYD NORRIS
Published: February 19, 2009
If the economies and stock markets of the world were graded on a curve, the United States would be doing quite well.
By FLOYD NORRIS
Published: February 19, 2009
If the economies and stock markets of the world were graded on a curve, the United States would be doing quite well.
Stock prices in the United States have fallen sharply since the end of 2007, but the situation is even bleaker in some other countries.
In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad.
Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent.
Even in the area of exploding mortgages, the United States has done better than some countries, particularly in Eastern Europe. There it is possible now to owe twice what a house is worth — even if the house has not lost much of its value.
Grading on the curve, as any college student knows, requires that a certain proportion of high grades be given out no matter how badly the class as a whole performs. If the best student in the class gets just over half the answers right on a difficult test, that student deserves an A.
The real world, alas, does not score success in that way.
Consider how much money you would have left if you had put $100 into the stocks in the leading market indexes of major countries at the end of 2007, less than 14 months ago.
In the United States, you would now have about $53. That fact — coupled with the reality that more Americans than ever are depending on the stock market to pay for their retirement — has severely depressed sentiment and spending.
But it merits one of the top grades in this world. Among major markets, only Japan, at $59, has done better. In Britain, France, Spain and Germany, the figure would be around $45. In Italy, it would be $37. About a quarter of the money would still be there in countries like Ireland, Greece and Poland.
Remember the BRIC countries, where growth possibilities seemed limitless not long ago? The stars there are Brazil and China, where about $46 or $47 remains. In India, the figure is $35, and in Russia it is $23. At least they have all done a lot better than Iceland, where you would have just $3 left of your hypothetical $100.
All this failure, whether in markets or economies, is feeding upon itself. Imports and exports are falling nearly everywhere. “Our exports have been hurt more by the global recession than their exports have been hurt by our recession,” said Roger Kubarych, an economist at the Unicredit Group in New York.
Nowhere does the situation appear more dire now than in Eastern Europe.
Many of those countries had been running large current-account deficits, just as the United States has been doing. But the United States still has the ability to borrow all the dollars it wants — in part because lenders know the United States can print more of them if it needs to.
Eastern European countries have no such printing presses, and those countries that can borrow show little interest in sharing the bounty.
“Emerging Europe appears to be suffering a ‘sudden stop’ in financing, which could cause the region’s economy to contract by 5 percent to 10 percent this year,” said Neil Shearing, an economist at Capital Economics in London. “Markets in Eastern Europe appear to be in meltdown.” He says the Baltic economies could shrink 20 percent this year.
The latest collapses are both a cause of and a result of worries about the health of banks in the region, many of which are owned by Western European banks. Some of those banks did a fine job of pushing “affordable” mortgages that are turning out to be just the opposite, endangering both borrower and lender.
The details differed from the subprime lending that was a major cause of the destruction of capital in the American banking system. There were no “Ninja” loans (no income, no job or assets) that would produce exploding monthly payments within a couple of years. Instead, the banks pushed mortgages denominated in foreign currencies — largely the euro and the Swiss franc — where interest rates were much lower than in the local currency markets.
The risk was obvious. What if the local currency lost value rapidly? That is just what is happening. The Hungarian forint is down by about a quarter this year against the Swiss franc, and by more than half since last summer.
That means someone who bought a house in Hungary last summer, financing it with a Swiss franc loan, now owes more than twice as many forints as he or she borrowed, and has a monthly payment that has increased by a similar amount. Even if the home’s value has not fallen and the homeowner’s job is safe, he or she may be in desperate straits. In fact, unemployment is rising and house prices are falling.
It has been noted in what Donald H. Rumsfeld called the “old Europe” that the European countries in the direst straits tend to be the ones that accepted American financial advice with the most enthusiasm. Now, however, few Americans seem to be interested.
Part of the Obama plan to revive the American financial system is an expansion of the TALF program, announced but not carried out by the Bush administration. That program — short for Term Asset Backed Securities Loan Facility — is supposed to stimulate financing for things like credit cards and student loans.
But the loans are not for just anybody. At least 95 percent of the money must go to American borrowers. “It is a ‘Lend America’ program,” said Mr. Kubarych.
When world leaders gather, there is a lot of talk about coordinated policies. When the leaders go home, it is every country for itself. Unfortunately, as the United States ought to have learned, doing better than anyone else may not be nearly enough.
Floyd Norris’s blog on finance and economics is at nytimes.com/norris.
In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad.
Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent.
Even in the area of exploding mortgages, the United States has done better than some countries, particularly in Eastern Europe. There it is possible now to owe twice what a house is worth — even if the house has not lost much of its value.
Grading on the curve, as any college student knows, requires that a certain proportion of high grades be given out no matter how badly the class as a whole performs. If the best student in the class gets just over half the answers right on a difficult test, that student deserves an A.
The real world, alas, does not score success in that way.
Consider how much money you would have left if you had put $100 into the stocks in the leading market indexes of major countries at the end of 2007, less than 14 months ago.
In the United States, you would now have about $53. That fact — coupled with the reality that more Americans than ever are depending on the stock market to pay for their retirement — has severely depressed sentiment and spending.
But it merits one of the top grades in this world. Among major markets, only Japan, at $59, has done better. In Britain, France, Spain and Germany, the figure would be around $45. In Italy, it would be $37. About a quarter of the money would still be there in countries like Ireland, Greece and Poland.
Remember the BRIC countries, where growth possibilities seemed limitless not long ago? The stars there are Brazil and China, where about $46 or $47 remains. In India, the figure is $35, and in Russia it is $23. At least they have all done a lot better than Iceland, where you would have just $3 left of your hypothetical $100.
All this failure, whether in markets or economies, is feeding upon itself. Imports and exports are falling nearly everywhere. “Our exports have been hurt more by the global recession than their exports have been hurt by our recession,” said Roger Kubarych, an economist at the Unicredit Group in New York.
Nowhere does the situation appear more dire now than in Eastern Europe.
Many of those countries had been running large current-account deficits, just as the United States has been doing. But the United States still has the ability to borrow all the dollars it wants — in part because lenders know the United States can print more of them if it needs to.
Eastern European countries have no such printing presses, and those countries that can borrow show little interest in sharing the bounty.
“Emerging Europe appears to be suffering a ‘sudden stop’ in financing, which could cause the region’s economy to contract by 5 percent to 10 percent this year,” said Neil Shearing, an economist at Capital Economics in London. “Markets in Eastern Europe appear to be in meltdown.” He says the Baltic economies could shrink 20 percent this year.
The latest collapses are both a cause of and a result of worries about the health of banks in the region, many of which are owned by Western European banks. Some of those banks did a fine job of pushing “affordable” mortgages that are turning out to be just the opposite, endangering both borrower and lender.
The details differed from the subprime lending that was a major cause of the destruction of capital in the American banking system. There were no “Ninja” loans (no income, no job or assets) that would produce exploding monthly payments within a couple of years. Instead, the banks pushed mortgages denominated in foreign currencies — largely the euro and the Swiss franc — where interest rates were much lower than in the local currency markets.
The risk was obvious. What if the local currency lost value rapidly? That is just what is happening. The Hungarian forint is down by about a quarter this year against the Swiss franc, and by more than half since last summer.
That means someone who bought a house in Hungary last summer, financing it with a Swiss franc loan, now owes more than twice as many forints as he or she borrowed, and has a monthly payment that has increased by a similar amount. Even if the home’s value has not fallen and the homeowner’s job is safe, he or she may be in desperate straits. In fact, unemployment is rising and house prices are falling.
It has been noted in what Donald H. Rumsfeld called the “old Europe” that the European countries in the direst straits tend to be the ones that accepted American financial advice with the most enthusiasm. Now, however, few Americans seem to be interested.
Part of the Obama plan to revive the American financial system is an expansion of the TALF program, announced but not carried out by the Bush administration. That program — short for Term Asset Backed Securities Loan Facility — is supposed to stimulate financing for things like credit cards and student loans.
But the loans are not for just anybody. At least 95 percent of the money must go to American borrowers. “It is a ‘Lend America’ program,” said Mr. Kubarych.
When world leaders gather, there is a lot of talk about coordinated policies. When the leaders go home, it is every country for itself. Unfortunately, as the United States ought to have learned, doing better than anyone else may not be nearly enough.
Floyd Norris’s blog on finance and economics is at nytimes.com/norris.
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