Slow recovery predicted for the US

| 24/01/2011

(CNS): Journalist Clive Crook and keynote speaker at this year’s Cayman Business Outlook said that the United States would be in for slow growth this year because of a number of pressures bearing down on its economy. Whatever happens in the US was, according to Crook, of tremendous importance to the Cayman Islands because the island’s tourism was based upon US visitors and the Cayman Islands dollar was pegged against the US dollar. “We should not underestimate the US,” he said, however he noted that current politics in the US were currently at a “pivotal moment” as the world was about to find out about America’s capacity to govern itself, as President Obama comes to grips with a Republican majority in the House of Representatives.

“There is currently a clash between the chronic difficulties with the infrastructure of government in the US and a convergence of economic problems which have no roots in politics. These are clashing head on,” he said. The US, Crook said, was in for a very un-American long and slow recovery. “Past deep recessions have seen a sharp recovery but this recovery is more like a British recovery and will happen very slowly,” he said.

The recession has, according to Crook, “disturbed the whole pattern of economic life in US households” as they try and get their heads above water as a result of the housing crisis. “I believe the zeal to deleverage will abate eventually to just moderate anxiety but this is why the recovery will be so slow,” Crook explained. “There will be no rapid recovery. So long as households try and get on top of their personal finances and restore their savings, consumption will be slow and there will be sluggish growth.”

Another worrying event that Crook believes will slow down recovery will be the influx of regulation by the US government to attempt to better regulate the financial markets.

Crook said, “Too much regulation creates more of a problem than a solution. The US government has embarked on an incredibly ambitious regulatory reform plan but the implications of which are shrouded in mystery. They have produced 2,000 pages of instructions on the regulation – new rules to recast the financial regulatory landscape.” He said the concern in this regard was that these new rules may take the same form as the last set of US knee-jerk reaction regulations (known as the Sarbannes-Oxley Act of 2002 which followed the Enron collapse) which he called an “ill-considered response which created more problems than it solved.”

The threat of an increase in interest rates was also an issue of concern, according to Crook. He said he was not sure that China’s capital flows into the US would continue which would threaten to increase long term interest rates, at a time when America needed them to be kept low.

Measures taken by the Federal Reserve Bank including lowering interest rates and quantative easing (namely printing money) would only be short term solutions.
Crook did have praise for the Fed, when he said, “The Federal Reserve deserves full marks for the measures they took to ease the economy. At the time we were worrying that this could be the next great depression but all we have nowis a disappointing recovery rather than a catastrophe.”

Nevertheless, he said that this was a dangerous recession and that the US could not afford to pussy-foot about as the main worry right now was acute political uncertainty.

More from CBO: Slowdown for China needs careful handling

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  1. Shock and Awe says:

    From the BBC World News, Jan. 27:

    The US Financial Crisis Inquiry Commission, tasked with establishing the causes of the crisis, said it was "avoidable".

    Its report highlighted excessive risk-taking by banks and neglect by financial regulators.

    Only the six Democrat members of the 10-strong commission, set up in May 2009, endorsed the report’s findings.

    "The crisis was the result of human action and inaction, not of Mother Nature or models gone haywire," the report said.

    "The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public.

    "Theirs was a big miss, not a stumble."

    Ethical breaches

    The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done”

      Phil Agelides Financial Crisis Inquiry Commission

    The damning report criticised the extent of the financial deregulation overseen by the former chairman of the FEDERAL RESERVE, Alan Greenspan.

    It concluded that the crisis was caused by a number of factors:

    • Failures in financial regulation, including the FEDERAL RESERVE’S failure "to stem the tide of toxic mortgages"
    • A breakdown in corporate governance that led to "reckless" actions and excessive risk taking by financial institutions
    • Households taking on too much debt
    • A lack of understanding of the financial system on the part of policymakers
    • Fundamental breaches in accountability and ethics "at all levels".

    It added that "collapsing mortgage-lending standards" and the packaging-up of mortgage-related debt into investment vehicles "lit and spread the flame of contagion".

    These complex derivatives, which were traded in huge volumes by major investment banks, then "contributed significantly to the crisis" when the mortgages they were based on defaulted.

    The report also highlighted the "abysmal" failures of the credit ratings agencies in recognising the risks involved in these and other products.

    Blame game

    Leading figures of the George W Bush and Obama administrations were not let off lightly:

    • Former FEDERAL RESERVE chairman Alan Greenspan was accused of "championing" financial deregulation during the credit boom that "stripped away key safeguards".                                                                                                                                                                From the above article:   Crook said, “Too much regulation creates more of a problem than a solution. The US government has embarked on an incrediblyambitious regulatory reform plan but the implications of which are shrouded in mystery. They have produced 2,000 pages of instructions on the regulation – new rules to recast the financial regulatory landscape.”                                                                                                                                                                                                  Also from the above article:    “The Federal Reserve deserves full marks for the measures they took to ease the economy. At the time we were worrying that this could be the next great depression but all we have now is a disappointing recovery rather than a catastrophe.”                                                                                                     I rest my case.                       
  2. Anonymous says:

    Mr. Crook is a journalist for the Financial Times and is reporting his findings. I attended the forum and thought he spoke well even if it stated the obvious. Despite the damage done by previous administrations it is our own responsibility to try to ensure history does not repeat itself which was a part of his message. We do need to save more and borrow less and help ourselves and not rely on government for the same reasons expressed by some of the comments that others have posted. While politics has alot to do with the current financial difficulties and the retailers are all waiting for consumer confidence to return and spend spend spend we need to not spend spend spend and save save save and let recovery come more from stimulus so that when the asset or credit bubble bursts again (as it will) we are better prepared. Prevention better than the cure. One of the founder members of fitness who just passed away Jack LaLanne said it best "dying is easy but living is hard".

    • Shock and Awe says:

      Anonymous 11:07 my post was to point out that there was criminal activity involved in the financial crisis.  It is coming to light now but if there had been some curtailment of the risky ventures it would not have had the impact presently suffered by many Americans. The mistake made by the Bush administration, and prior to that Reagan, was to assume the financial industry had anyone’s interest in mind but the financial industry’s and Obama is making the same mistake again. The real issue is they can not regulate themselves, and have no interest in regulations of any sort.  For instance the bailout was supposed to inject funds into the economy via banks,etc., for after all they were public funds being delivered.  They were the conduit whereby the economy would be put back on it’s feet.  But instead the funds were pocketed by those institutions without any accountability, used to buy out competitors, and foremost, to finance a failed regime of obscene bonuses.  Investors suffered losses and people lost their savings homes and pensions because of fraud.  Yet, to date no one involved in this preventable catastrophe has been taken to task or been held accountable.  Wrist slapping is all we’ve heard.  Amongst all this the spin continues, upheld by Mr. Crook, it is the people who are to blame for spending too much, not saving enough,…that they were the cause of the sudden collapse oftheir economy. That is false.  Until the reality check takes place that while everyone was getting up and going to work each day their economy and their future was being manipulated for short term gain for a few. And long term pain for many. That is stating the obvious. 

      It seems now too late for the experts conspicuous for their absence at the time to make pronouncements based on concepts fed to them by the same people who caused the problem.

      The Financial Times was behind the times, wouldn’t you say?

  3. Shock and Awe says:

    Bye the way Mr. Crook households don’t need "to get on top of their personal finances and restore their savings"….. they need to throw the leeches out.  And in case you hadn’t noticed Americans are OUT OF WORK.  Millions of them.  And what work they can get means taking PAY CUTS to secure employment.  As they lose their homes, and pensions.  To top it off, this guy has been drinking the kool aid of "too much regulation is a bad thing"…not nearly enough oversight or regulation worsened the financial crisis. And in many ways caused it.  Agreed, this recession is a bad one, BUT….this recession was planned, and executed by financial institutions, who are now playing dumb.  "We didn’t see it coming. It was a complete surprise.  And strangely enough, even if we did lose billions through mis-management and stupidity, we’re richer now, than we were before."  Would you gamble if all your bets were covered?  Because that’s what happened Bush was on his way out.  He could not steal any more elections. Their last chance "Leave the vault open George."  And the trillion dollar bailout of their gambling debts was pushed through, sold, and rubber-stamped by Henry Paulson their henchman as he was on his way out the door.  It was the largest transfer of public funds by government in U.S. history.  Sold to the American public as a way "to save the economy from collapse."  To put it mildly it was theft. Couched in propaganda and fear.  Americans weren’t in financial trouble and they were surprised to hear it.  No. AIG was.  Merrill Lynch was.  Wells Fargo was.    B of A was.  Goldman Sachs was. Lehman was.  For good reason. Their fictitious transactions were unravelling and coming home to roost.

    Less regulation???  That’s bizarre.  What regulation???  The Federal Reserve saved the day???  Don’t go there. Are you serious???

     

  4. Lachlan MacTavish says:

     With all due respect to Mr. Crook this is old news. The theory of slow USA recovery compared to the past bounce recovery was discussed 18 months ago. 

  5. Anonymous says:

    I would certainly like to hear more of Mr. Crooks’ explanation regarding "a convergence of economic problems which have no roots in politics". So according to Mr. Crooks, the lack of US regulations in US banking has no political basis? Here’s a recent headline "More than two-thirds of campaign contributions from Wall Street employees in June went to Republicans as the Democratic-controlled Congress moved to enact legislation to overhaul the financial industry, a new study found. The legislation, which cleared the Senate in July with three Republican votes, represented the biggest overhaul of financial regulations since the Great Depression." Let’s get real, here. Politics has a lot to do with the current financial difficulties that the US faces, and the biggest part of that can be laid squarely at the feet of the last administration.

    CNS: The House/Senate error was noted and changed. Thanks for both commenters who pointed that out.