Daily Archives: August 20, 2008

by Mickey Levy

It is not just the rapid decline in home prices but the uncertainty about how much further they will fall that stands out as one of the largest negative factors hanging over the economy and financial markets. The current pace of adjustments suggests that uncertainty will begin to abate late this year and early 2009.

Falling home prices increase affordability and are necessary to reduce bloated inventories of houses for sale, but expectations that prices will fall further keeps potential buyers on the sidelines. And this same uncertainty creates havoc in financial markets by driving up credit losses and making it nearly impossible with any degree of reliability to value a sizeable portion of the over $10 trillion of mortgage securities held by banks, investment banks, Fannie Mae and Freddie Mac and a wide array of global investors. This has plagued mortgage markets and pushed up mortgage rates even as the Federal Reserve has eased 325 basis points. A key channel through which the Fed’s monetary easing is supposed to stimulate the economy has been gummed up. Read more

By Jagdish Bhagwati Read more

by Raghuram Rajan

Many commentators are looking for an increase in domestic demand in emerging markets to compensate for the slowdown in the US. Indeed, domestic consumption is picking up in several countries including China, while governments in Asia and the Middle East are turning to neglected public investment. Yet years of strong growth and cutbacks in public investment, which have restored economic health to emerging markets, have also eaten up excess capacity. Any increase in domestic demand, if it is not to result in bottlenecks and even higher inflation, will have to be accompanied by a shift in production from an external focus to an internal focus. This means that emerging market currencies will have to appreciate, and the weight of output will shift from traded goods such as T-shirts and electronics to non-traded goods such as real estate and health services over the next few years. Read more