Transcript

Host: This is “On the Line,” and I’m Eric Felten.

President George W. Bush says, “It’s clear our economy has slowed. But Mr. Bush says, “The good news is we anticipated this and took decisive action to bolster the economy.” The U.S. Congress passed and President Bush signed an economic growth package, giving tax rebates to American workers and tax incentives to business. And the Federal Reserve, the United States’ central banking system, has cut interest rates and has supplied financing to rescue troubled investment companies:

Bush: “The steps we’ve taken, together with the actions taken by the Federal Reserve, will have a positive effect on our economy. So, my message to the American people is this -- I know this is a difficult time for our economy, but we recognized the problem early and provided the economy with a booster shot.”

Host: Mr. Bush says that for the United States’ economy to grow, the U.S. needs to continue to expand free trade around the world:

Bush: “During this time of economic uncertainty, when consumer spending and investment is slowing down, it’s important to understand the role trade has made for our economy. Last year, exports accounted for more than forty percent of our total growth. That’s good news. Export is continuing. This January, exports were up more than sixteen percent over last January. If you’re worried about the economy, it seems like you ought to be sending a clear signal that the United States of America will continue to trade, not shut down trade.”

Host: U.S. exports have been helped by the relative weakness of the dollar, which makes American goods less expensive when paid for in stronger foreign currencies. But the weak dollar also threatens the U.S. economy with inflation, as the cost of imports, such as oil, soars. Treasury Secretary Henry Paulson says that the goal of U.S. monetary policy is to keep the dollar from losing value:

Paulson: “We have a strong dollar policy. It’s very much in our nation’s interest. Our economy has ups and downs. The long-term fundamentals -- and I’m very confident about this -- When we look at our long-term fundamentals compared with other major countries around the world, we have strong long-term fundamentals.”

Host: What next for the U.S. economy? How will difficult times in the United States and the way policy makers address those difficulties affect the global economy? I’ll ask my guests: Heidi Rediker, co-director of the Global Strategic Finance Initiative at the New America Foundation; and a policy analyst in the Center for International Trade and Economics at the Heritage Foundation: Anthony Kim; and joining us from our New York studio, Gordon Chang, author of the book: “The Coming Collapse of China.” Welcome, and thanks for joining us today.

Anthony Kim, let’s start by talking about, just in general terms -- What is the state of the U.S. economy?

Kim: Well, the state of the U.S. economy -- I think President Bush really, you know, realistically assessed it. We are in a slowdown, not a recession. The National Bureau of Economic Research -- They haven’t come out saying that we are in an official recession. But what we are seeing these days, obviously, is a slowdown. We’ve been enjoying a really, you know, enjoyable economic growth over the last five years. So, what we are seeing is, more or less, slowdown and economic correction. So, I guess we have to be a bit more realistic rather than pessimistic.

Host: What’s your sense, Heidi Rediker?

Rediker: We’re certainly facing a very challenging environment. I think economists are generally split as to whether or not this is technically going to be an official recession or not.

Host: What makes something an official recession?

Rediker: I’ll turn that over to my...

Kim: I mean, this is kind of a – There’s the National Bureau of Economic Research. They have the Business Cycle Dating Committee. What they do is look at all the different economic data. They officially said, “Okay, from this day on, this is an official economic recession.” As I said earlier, they haven’t done it yet. So, we are not in an official recession. What we are seeing, again, this is a slowdown -- maybe some kind of recession in the housing market and financial market, but not throughout the whole economy. So, that’s why I’m saying we’re going through this slowdown. We have to be, you know, a bit more realistic rather than pessimistic about this economic slowdown.

Host: Gordon Chang, are you there in New York?

Chang: I am.

Host: What’s your sense of economies abroad? In China, for example, how do people see the U.S. economy, and are they concerned?

Chang: They are extremely concerned. Chinese premier Wen Jiabao just two days ago voiced his concern about the weak dollar. The Chinese are very concerned because they have an export-led economy. Last year, their total export surplus was something on the order of two hundred and fifty-six or so billion dollars, which was almost exactly the same amount of their surplus against the United States. So, a slowdown or a recession or whatever you call it in the United States is going to have a very big impact on China’s export-led economy. And it’s true, also, throughout the Asian region and around the world. We’ve seen stock markets tumble because of concerns in the U.S. So, this is going to be something that’s going to affect not just here in the United States, but abroad, as well.

Host: Heidi Rediker, what’s your sense of how troubles in U.S. financial markets are greeted by financial markets abroad?

Rediker: I think, you know, the Federal Reserve has stepped up and taken some pretty unprecedented steps to calm markets over the past few days, and particularly on the back of what happened with Bear Stearns. So, I think --

Host: Let’s talk about what happened with Bear Stearns. You had a prominent financial house that was looking like it was going to collapse because it had mortgage-backed securities that were falling in value.

Rediker: With Bear Stearns, there was -- the question of credibility of financial institutions is extremely important. And when the head of Bear Stearns came out several days prior to the announcement and said that their liquidity position was actually okay, it turned very, very quickly in the wrong direction once they were faced with customers pulling accounts and calls being made on their capital. So, you know, it was a very, very rapid deterioration.

Host: And so what did the Federal Reserve do to resolve the situation?

Rediker: They put up a very large facility, a thirty-billion-dollar facility that -- and intermediated between JPMorgan’s offer to purchase Bear Stearns.

Host: So, basically they came up with financing for part of JPMorgan, another prominent investment company, being able to buy Bear Stearns.

Rediker: They facilitated the transaction and plugged a hole and I think gave some confidence to the markets that the Federal Reserve was actually going to be there and playing an active role.

Host: Anthony Kim, how much room do policy makers -- either the President or the Federal Reserve or the Treasury -- have to be able to affect what happens in an economy that's sort of shaking out?

Kim: My assessment is that they don’t have that many options, but I think what they are doing is quite rational and very reasonable. And I think they know they don’t have that much time, either. So, in Bear Stearns' case, it wasn’t really a traditional bailout. It was more or less buy out, kind of helping Bear Sterns through JPMorgan Chase. So, it was facilitating sort of a real need, market transaction between two private banks: JPMorgan and Bear Stearns. So, they know it has to be through this market-based-functioning mechanism. I think the Federal Reserve knows about it. I think that’s why they are cutting another interest rates. Actually, yesterday they cut another seventy-five basis [points]. So, I think the recipe of what they’re doing is quite correct at this point. But again, I don't think -- We should avoid economic pessimism -- If we’re really getting into debt, then I don’t think the situation will be much worsened.

Host: Gordon Chang, how is the near collapse of Bear Stearns and its rescue seen abroad? Is it seen as a canary in the coal mine or as an indication that the U.S. will stabilize things?

Chang: Probably both, but I think that the first reaction was the canary in the coal mine, that here you have a very prominent Wall Street institution, on the verge of insolvency. And so the news was taken quite badly. And I think that it’s interesting because Asians, for instance, were just taken aback by this. You’ve got to remember that just a month and a half or so ago, a Chinese-government entity agreed to buy shares in Bear Stearns for something like twenty-six or twenty-seven dollars a share. And just a couple days ago, JPMorgan agrees to buy it for two dollars a share. And that really has taken some people really by surprise. So, this is not going to be taken as good news around the world. You know, eventually, I think that the resolve of the Federal Reserve to stand behind American financial institutions is going to comfort people outside the United States. But there are many policy implications with that, and not all of them are good ones.

Host: Heidi Rediker, how are these sovereign-wealth funds -- these investment funds that are managed by governments around the world that have become increasingly prominent -- How are they viewing the situation in the U.S. and whether now is a good time to invest their money or a dangerous time to invest their money?

Rediker: They were ones who stepped up very early in the process when there was some need for capital raising by some large U.S. financial institutions and global financial institutions. So, they came in early and took stakes in large financial institutions like Citigroup, like Morgan Stanley, and were there, and it was very helpful. There is probably a on the back -- and we’re reading the tea leaves -- on the back of Bear Stearns not getting additional capital from sovereign-wealth funds. It was rumored that they were looking for some -- one might assume that sovereign-wealth funds, as a whole, are probably waiting for a little bit more of a calming of markets and particularly an understanding of what the risks are that are out there still for investment in financial institutions. But all of these sovereign-wealth funds are very different in the way that they look at investments. They’re different in the way that -- Some look more like private-equity firms. Some look more like your traditional asset managers, portfolio managers. So, it’s very hard to actually make a sweeping judgment about what they're thinking at any given time.

Host: Anthony Kim, what’s your sense on sovereign-wealth funds and what role they have been playing in the U.S. economy and what role they’re likely to play in the future?

Kim: I guess they’re increasingly becoming a global kind of actor in this age of globalization. They have money, and they want to invest their money into more profitable assets and funds around the world. So, I think that’s what we are seeing these days. But as Heidi correctly pointed out, each sovereign-wealth fund -- I think they are different. -- We just sum it up as big sovereign-wealth funds, kind of in a way trying to buy U.S. assets these days, but if you look at China’s sovereign-wealth fund, that’s really different from sovereign-wealth funds in UAE or Qatar. Because China -- They kind of recently joined this sovereign-wealth-fund scene through excessive foreign reserves, but if you look at UAE and Bahrain and Qatar, they have these commodity assets -- oil, mainly. And then they have more trained analysts in terms of allocating their assets. So, each sovereign-wealth fund -- They are different in terms of their operation and maybe certain strategies. But I think we have to make sure that they are operating on the basis of the market: transparency and cooperative governance because a sovereign-wealth fund -- Obviously, it has a global policy implication -- national interest and financial-market stability and cooperative governance. I think that’s why we have to have this kind of healthy and constructive debate on sovereign-wealth funds. And also I think we should encourage IMF [International Monetary Fund] to take a positive and productive role in guiding those sovereign-wealth funds.

Host: Gordon Chang, is China’s recently entry into the sovereign-wealth-fund business going to be shaken?

Chang: I think that it is. Bear Stearns, as I mentioned before, certainly took the Chinese by surprise. The Chinese have more than just two-hundred billion dollars in China Investment Corp. They’ve got all the state-development banks, and they have state-owned enterprises. So, they very well may have the largest sovereign-wealth pool of any nation on earth. And the concern, of course, as Anthony was talking about, is that countries will use their money for political purposes rather than just try to increase their return. So, it’s very important that we start to look at some of the motives behind these countries, because in these unaccountable, un-transparent nations with these one-party systems, I don’t think we want them to control the U.S. financial system. So, we have to be very, very concerned and have to go forward, I think, quite gingerly.

Host: Heidi Rediker.

Rediker: I don’t know if -- I mean, the “very, very concerned” part -- I would agree with Gordon on much of what he’s said, but the part that we need to actually look at is demystifying what sovereign-wealth funds actually are, because many of them have been around for a very long time. And the reason that we’ve got a heightened focus on them right now is because you have an increase in the number, and you have an increase in the size that analysts range could rise from two-and-a-half to three trillion -- which is what their estimated total size is today -- to about anywhere between twelve to fifteen trillion by 2015. So, you have a very dramatic rise, and it’s fairly concentrated, and it’s in government hands. So, that’s why you have a heightened interest. But it’s very important also to note that some of them have been in existence for a long time, have been very responsible, active market participants and that the U.S. has actually done – We’re fairly well-protected as compared to other industrialized countries on the recipient end of those funds. So, I would just highlight those points, both the work that the IMF is doing to encourage greater transparency and codes of conduct, and basic good governance is also being complimented by the work that the OECD [Organization for Economic Cooperation and Development] is doing to come up with good rules for recipient countries to make sure that open markets remain open and that we can facilitate flows between sovereign-wealth funds, as well as other market participants, very well.

Host: Anthony Kim?

Kim: Yeah, I just want to follow Heidi’s point. If you look at those sovereign-wealth funds, we have countries like Singapore and Norway. They’ve been out there for some time. They’re likely to be more transparent than Saudi or UAE or Bahrain. And if you look at The Heritage Foundation and “Wall Street Journal” -- We annually put out an index called Index of Economic Freedom. In that index, we have investment freedom and financial freedom. If you look at countries like Saudi and UAE and Bahrain, they’re investment freedom and financial freedom is not that high. It’s less than fifty percent. So our policy should be to encourage those countries to open up their financial markets, as well as welcoming those investments based on their transparency and cooperative governance. It should be two-way interaction rather than kind of knee-jerk, emotional kind of objections.

Host: Let’s move, and, Gordon Chang, let’s talk a little bit about what the implications for instability and potential recession in the U.S. have for markets abroad. Do you think at this point that the globalization of economies gives some kind of buffer to problems in one economy, or is it more likely that problems in one economy are going to spread to other economies?

Chang: I think that it’s the latter. We’ve seen this in the last month or so with news coming out of New York sort of rippling through Asia and Europe, on both the positive and the negative side. So, many people in Asia seem to think that their economies have become de-coupled from the American one. But that’s not true, at least in the financial sense. So, in ordinary times -- I think that if you have prosperity in one part of the world, it can certainly help with others that are going through downturns. But nonetheless, with everything coming so interconnected, something can pull down the rest of the global economy. We’ve seen this in the past. Hopefully the institutions that have been developed in response to the Great Depression, for instance, will be able to provide these buffers. But nonetheless, when you have global economic shocks, I don’t think any institutions that we have been able to devise will be able to protect us. We've had a very good economy now for more than a decade, and just the normal economic cycles means that there are going to be downturns. There’s going to be a downturn in the United States, and there’s certainly going to be one in China in the not-too-distant future and the two very large economies could have an effect on everybody else.

Host: Heidi Rediker, what’s your sense on that?

Rediker: I think that while we’re facing a challenging environment, we are certainly -- I think both Congress and the U.S. and the Treasury are looking very rationally at what we have to face right now. So they’re also working very closely with Wall Street and with their counter-parties in Europe and Asia to make sure that we don’t face a larger downturn than we actually need.

Host: Let me ask Anthony Kim. We only have about a minute left. On this sort of “What is being sought from counterparts in other countries?” -- What kind of policies is the U.S. looking for at this point from other nations, and what’s the chance they’re going to get it?

Kim: Yeah, well, I just want to emphasize that -- Again, we’ve been talking about this economic slowdown -- Whether you call it recession or downturn, we are slowing down. But I think, again, this economic pessimism shouldn't be tangled with protectionism. So, as President Bush earlier said -- free trade. We should continue our policy of promoting free trade throughout the world. We have three pending FTAs with our neighbors Colombia and Panama --

Host: FTAs being free-trade agreements.

Kim: Those free-trade agreements with Panama, Colombia, and South Korea -- I think that can be another nice stimulus package into our economy. So, we really should avoid any situation where economic pessimism is tangled with protectionism. Then I think we’ll have a real problem. So, I think we should avoid that situation.

Host: I’m afraid that’s going t o have to be the last word for today. We’re out of time. But I’d like to thank my guests: Heidi Rediker, co-director of the Global Strategic Finance Initiative at The New America Foundation; and a policy analyst at the Center for International Trade and Economics at the Heritage Foundation: Anthony Kim; and joining us from our New York studio, Gordon Chang, author of the book “The Coming Collapse of China.” Before we go, I’d like to invite you to send us your questions and comments. You can reach us through our website at www.voanews.com/ontheline. For “On the Line,” I’m Eric Felten.