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US Financial Crisis Threatens Global Economy


The fate of the Bush Administration’s plan for a massive bailout of the nation’s troubled financial sector remains unclear. At the White House Thursday, President Bush met with top lawmakers to hammer out a deal on the specifics of the proposed $700 billion bailout. But despite what some at that meeting called a great sense of urgency, involving heated debate, no agreement emerged. There were lingering concerns, especially among House Republicans, about whether the package included enough protection for taxpayers.

Background of the Problem

The U.S. crisis stems from millions of mortgages given in recent years to homebuyers with poor credit or unstable finances. This month the U.S. Treasury Department pledged to make good on trillions of dollars of obligations of Fannie Mae and Freddie Mac, America’s two largest mortgage companies. But world equity markets tumbled last week as Lehman Brothers, a major U.S. investment bank employing 25,000 people worldwide, failed to find a merger partner and sought protection under U.S. bankruptcy laws. Then the financially strapped Merrill Lynch, America’ biggest brokerage firm, was acquired by Bank of America. Last week, the U.S. government agreed to provide an $85 billion emergency loan to American International Group, or AIG, the world’s biggest insurance firm.

Earlier this week world leaders at the United Nations’ General Assembly meetings in New York were nearly unanimous in saying that the financial turmoil in the world’s largest economy was threatening the global economy. As the crisis became evident, stock prices plunged around the world.

A Russian Perspective

In Russia’s fledgling market economy, officials moved to suspend trading after stocks there fell harder and faster than they did in any other major market. Although Russian leaders have pointed their fingers at Washington, the Russian economy was already in trouble. So says Dmitri Siderov, bureau chief for Kommersant, Moscow’s business and political daily. Speaking with host Judith Latham of VOA News Now’s International Press Club, Siderov says there were already indicators of the problem. One of those was the precipitous market decline of Russian coal and steel producer Mechel, as well as the Kremlin’s attempt to take over the company. Another was the bitter fight for control of Russia’s third-largest oil company, TNK-BP. But the “most significant” cause triggering the current financial strain, according to Dmitri Siderov, was Russia’s invasion of Georgia last month. One result, he says, was that foreign investors withdrew about $35 billion dollars from the Russian market.

Another worrying factor, Siderov explains, is the volatility of energy prices, since proceeds from oil and gas represent about 50 percent of the Russian state budget, and Russia’s financial market has fallen 50 percent since its peak last May. In an economy that is a “slave to politics,” he says, that constitutes a big problem.

An Asian Perspective

Indian journalist Jehangir Pocha, editor of Business World in New Delhi, formerly covered the political and economic scene in Beijing for the Boston Globe newspaper. He says the Bush administration’s proposed $700 billion financial bailout plan has definitely cheered markets in Asia. However, he cautions, it is not clear whether or not these markets will be able to sustain high levels on their own without artificial support.

Pocha says he thinks, for example, that people in India seem to be smoking “some sort of success pipe,” which they believe makes them immune to problems elsewhere in the world. And he says there is a sense that India’s domestic economy is strong enough to get along without Western support, which is unrealistic. Contrary to the optimism of many analysts, Pocha predicts that things may get worse in India before they get better. He stresses that India’s economy is less closely linked to Japan, China, and the rest of Asia than it is to the United States.

On the other hand, Pocha says, China’s economy is closely linked to Europe, America, Japan and Southeast Asia. Because it has a more global economy than India does, China is more susceptible to changes in other areas of the world. Pocha suggests that the biggest concern of countries like China and Japan starts with their governments because both nations have invested hundreds of billions of dollars in U.S. securities. According to Pocha, one of the reasons that the United States had to prop up Fannie Mae and Freddie Mac was that so many foreign governments had invested their surplus in U.S. Treasury bills and in U.S. companies.

A European Perspective

Scottish journalist Robbie Dinwoodie, political editor of The Herald in Edinburgh, says he and many of his colleagues were actually unfamiliar with the term “sub-prime” until a few months ago when the fact that risky mortgages had been sold around the world became front-page news. Dinwoodie says that, when a huge volume of these mortgages were bundled up and sold to other banks around the world, it led to a credit crunch.

According to Robbie Dinwoodie, people are astounded that America has begun what he calls nationalizing banks and nationalizing “big debt.” Nonetheless, he observes that people around the world mostly do not question the U.S. government’s plan to underwrite that debt because they so badly want the ripple effect to stop.