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South African Economist Calls US Turmoil Crisis of Confidence

The failure of US lawmakers to pass the $700 billion financial bailout package – and the historic plunge on wall street Monday – are being watched closely around the world.

South African economist David Shapiro, acting CEO of Sasfin Securities, says this crisis is unlike any other. From Johannesburg, he spoke to VOA English to Africa Service reporter Joe De Capua about Wall Street's 777-point drop Monday.

"What you have to realize is that is the biggest drop in history. In fact, the drop was greater than after 9/11. And also what you have to remember is that it's (stock market) already been under pressure. The depth that markets have fallen is quite incredible," he says.

Asked whether he was surprised by the failure Monday to approve the legislation in the House of Representatives, Shapiro says, "I was surprised because I have great respect for (Treasury Secretary Henry) Paulson. The work that he has done to try and turn things around -- he has worked tirelessly. I have a great respect for (Federal Reserve Chairman Ben) Bernanke. I think they are clever men. They understand the market that they're in. They didn't create it and what they're trying to do is to correct what's gone wrong in the past. They're almost as ashamed as everybody else is about Wall Street, but that doesn't help anybody. The thing is to try and resuscitate the global economy -- first of course, to resuscitate the US economy…. But they had warned Congress that if you don't let this package go through the consequences will be dire."

Shapiro says warnings came from elsewhere as well. "Even respectable magazines like The Economist have come out and said, look, we don't know what the perfect package is, but they say some package has to be passed. It's better to have a bad package than no package at all," he says.

As for those advocating free market principles during the crisis, letting the market take its own course, Shapiro says, "It's too late for that. To get free market adjustments, for example, adjusting their accounting laws…bringing in some tax concessions and all issues around that are going to take weeks and months to push through. By which stage, I think banking lending would have frozen up and the US economy would have just ground to a halt…. We need to bring confidence again into the US economy. We need bankers to feel that they will be able to rebuild their balance sheets."

He says it's possible a bailout package could eventually yield a profit for the American taxpayer. He says as the crisis continues, investors will turn their attention to other large economies, such as India and China, for profitable ventures.

Shapiro calls it a crisis of confidence. "It starts with the banks. The [Federal Reserve] has made billions of dollars available to lend. But the banks are very nervous to actually lend it out. So even though the money is available to them, they're very scared. They're protecting their balance sheets. But holding back on lending to other banks, who in turn feel the pressure and in turn start to collapse," he says.