U.S., Global Economies Chug On, Despite Woes

Adam Posen, deputy director and a senior fellow at the Peterson Institute for International Economics, discusses how the weak U.S. dollar, the American real estate market and consumer confidence are affecting the U.S. and global economy. Posen talks with Robert Siegel.

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ROBERT SIEGEL, host:

So we have more of a housing slump to look forward to, a slower economic growth for a few months, not to mention high oil prices and a weak dollar. Adam Posen, the deputy director of the Peterson Institute for International Economics, joins us now from a meeting of European central bankers outside Frankfurt, Germany. Good to hear from you again, Adam.

Mr. ADAM POSEN (Deputy Director and Senior Fellow, Peterson Institute for International Economics): Thanks for having me, Robert.

SIEGEL: And do you share Chairman - well, for that matter, do the people you're rubbing shoulders with this week share Ben Bernanke's confidence in the resilience of the U.S. economy as opposed to in likelihood of a recession?

Mr. POSEN: Yes, I think nobody's going to put a number on it. I mean, I'm not an authority. But everybody's putting it well below 50 percent. And even if there was something that looked like a recession, it probably would be very short. I think most people, including us at our institute, are confident. We're looking at a small growth, slowdown growth, staying above one percent, and back to trend by the second half of '08. And trend means growing pretty solidly at two and a half percent or more.

SIEGEL: But to what degree does the prospect of a housing slump, meaning that lots of people who have felt buoyant about their position in the economy because they expected there has to appreciate in value every year, are feeling a lot less buoyant and unable to borrow against it as much?

Mr. POSEN: There's certainly that lack of buoyancy, but that difference between lack of buoyancy and sinking all the way to the bottom. I mean, it's kind of like what happened with the tech stock boom in the late '90s. There are a lot of people who felt rich for a while once Cisco or Yahoo or whatever was worth 10 times as much as it was really worth. And they were spending more as a result of that. But people weren't stupid. They were spending roughly five cents on the dollar of every dollar of gain they thought they had.

For housing, it's been sort of similar. They spend a little bit more, roughly six, six and a half cents on the dollar. But even if they cut that back, that's not enough to throw the economy into recession. And so you see these reports about confidence, and certainly, if you get people talking about this, they're not gonna say anything good. But that's a far cry, as Chairman Bernanke pointed out, from actually seeing spending significantly slow.

SIEGEL: What about the weak dollar, which I assume is putting a crimp in your style this week, being in Germany. Is it…

Mr. POSEN: You got that right.

SIEGEL: Is it an unmitigated bad for the U.S. or is there some silver lining to the weak dollar?

Mr. POSEN: There's a silver lining. The dollar is a mixed bag, just as it was on the way - go up strengthening against under currencies. On the one hand, we have the good news, which is one of the props to the U.S. economy over the last year, and will continue to be so for the next year, is exports. As the dollar goes down, our goods become cheaper relative to other goods. And certain industries, particularly in manufacturing, like autos and steel, become more competitive as a result. And so we create jobs, we create money, we create profits as the dollar goes down.

The mixed bag part, of course, is that, not just for me sitting here in Germany, but everybody in the U.S. who's buying imported goods - be it Chinese T-shirts or Arab oil - is having to pay more for that. So on the whole, it's not terrible and there's going to be an obvious growth benefit. But people are going to feel the pinch from the dollar going down.

SIEGEL: And is - and do you share any of the concern which Chairman Bernanke evidently doesn't, that if the dollar weakens too much, say China, which holds our debt, might decide to diversify a bit more and, say, hold more Euros?

Mr. POSEN: I think the Chinese are less of a problem than private markets in general. The Chinese have over a trillion dollars sitting there of U.S. denominated security, securities denominating dollars. And if they start selling those off, they'll take a huge capital loss. So putting it very crudely, it's not in their own interest.

But there are trillions of dollars sloshing around the world, as we talk about - be it London, New York or Tokyo markets. And there, it was an issue of people switching out of the dollar permanently, but how fast they do it. There's always a risk in asset markets. Exchange rates are an asset just like a stock or real estate. They can get out of control, that if there's a panic and you start selling very quickly, other people feel they have to sell. And that's the one thing, if I'm watching the central bankers, that they are watching, is that that doesn't accelerate out of hand.

SIEGEL: Well, Adam Posen, thanks a lot for talking with us once again.

Mr. POSEN: Thank you.

SIEGEL: Adam Posen of the Peterson Institute for International Economics spoke to us from outside Frankfurt, Germany, where he's attending a meeting of European central bankers.

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Bernanke Warns Congress of Economic Slowdown

Dollar Scorecard

The weak dollar produces both winners and losers. Here's a rundown of who is who:

Winners...

  • U.S. multinationals that sell in global markets. High-tech companies such as Intel, Cisco and Microsoft. Aviation giant Boeing. Even McDonald's (yes, they eat a lot of Big Macs in Europe).
  • Dollar bear Warren Buffett — his Berkshire Hathaway fund has made a multi-billion-dollar bet in favor of the Euro.
  • European shoppers snapping up bargains all across the U.S.
  • The U.S. tourism industry
  • Investment funds denominated in Euros

Losers...

  • Americans traveling overseas, especially to Europe (ouch!), and Americans who work overseas and are paid in dollars.
  • Foreigners with investments denominated in dollars
  • American motorists: As the dollar weakens, oil-producing nations demand even higher prices to compensate for the dollar's reduced value — and that means higher prices at the pumps.
  • American consumers: Imported goods from Europe will cost more, whether it's Italian glassware, French wine, a Volkswagen or a BMW.
  • Companies and consumers that rely on cheap credit to make purchases and investments. International investors demand higher interest rates when the dollar falls in value. Otherwise, they'll move their money elsewhere.
  • The Federal Reserve Bank: Fed policymakers have less room to cut interest rates when the dollar weakens, for fear that all those foreign imports (which now cost more) will fuel inflation.

— Uri Berliner

The surge in energy prices coupled with a crumbling housing market and tight credit are expected to constrict the U.S. economy as consumer confidence wanes.

Federal Reserve Chairman Ben Bernanke on Thursday detailed the economic picture for lawmakers, particularly stressing the blow the economy has had to absorb from the subprime mortgage debacle.

"[T]he economic outlook has been importantly affected by recent developments in financial markets, which have come under significant pressure in the past few months," Bernanke told Congress' Joint Economic Committee. "The turmoil in financial markets significantly affected the Federal Reserve's outlook for the broader economy."

Hours after Bernanke appeared on Capitol Hill, the stock market closed to another loss. According to preliminary calculations, the Dow Jones industrial average fell 33.73 points to 13,266.29, the Associated Press reports. Thursday's fall comes a day after the blue chips tumbled more than 360 points.

Mortgage Crisis Continues

The mortgage industry plunged into distress this summer as more borrowers missed payments on their home loans and investors soured on risky mortgage debt. This made it harder to sell home loans and forced dozens of lenders out of business.

More recently, leading investment firms Merrill Lynch and Morgan Stanley have announced that missteps in subprime investment caused them to write-off billions of dollars.

The fallout isn't over. Homeowners who took the risk of subprime and adjustable-rate mortgages increasingly cannot make higher payments as their loans reset.

"Delinquencies on these mortgages are likely to rise further in coming quarters as a sizable number of recent-vintage subprime loans experience their first interest rate resets," Bernanke testified.

After his prepared remarks, lawmakers lectured Bernanke about higher health-care costs and the social responsibility of making credit available to the poor. The Fed chairman was also pelted with questions about inflation, recession and the dollar's historic lows.

But most questions focused on turmoil in the housing market.

Bernanke would not assert that the economy was headed for a recession, though he did say the severe housing slump will hurt business growth.

"Weakness in the housing market will keep construction in a down trend," Bernanke told lawmakers.

Asked how to advise those in need of immediate help untangling a mortgage snare, Bernanke said, "Get in touch with your lender because experience shows the earlier you do so you'll be able to resolve the matter."

Though he reminded lawmakers of the Fed's first responsibility to maintain a healthy economy, he also sought to assure them that the Fed has a role in working with financial advisers serving lower- and lower-middle income communities to try to help them identify strategies to help.

"In these dimensions, we are doing what we can as a central bank to assist in resolving this problem," Bernanke said. "It has implications for individuals and the broader economy."

In recent months, the Federal Reserve and other banking agencies have issued statements calling on mortgage lenders and mortgage servicers to find prudent ways to resolve loan problems with existing borrowers.

He noted that stricter lending terms are now even hampering creditworthy borrowers.

Bernanke's testimony wasn't able to soothe Wall Street. The Dow dropped by triple digits after the chairman's testimony before rebounding to close down 33 points.

Bernanke was last before lawmakers in March. Since then, there has been a mixed bag of economic reports.

For example, the gross domestic product rose 3.9 percent during the July–September quarter, indicating the overall economy has some resilience. But sales of existing homes plunged a record 8 percent in September, marking the largest decline since 1999.

None of these factors bode well for consumers' confidence as they struggle with common living expenses, such as higher home-heating fuel and gasoline costs. That blurs the outlook for the upcoming holiday shopping season as well.

Retailers Report Losses

Retailers announced Thursday disappointing sales for October due to consumers' ongoing worries about housing and energy prices. The downbeat news came from all sectors, including mall-based apparel stores like Limited Brands Inc. and department stores like Macy's Inc. Even upscale Nordstrom Inc. posted a rare sales decline, while discount giant Wal-Mart Stores Inc., the world's largest retailer, posted sales below expectations despite its aggressive discounting heading into the holidays.

"Indicators of overall consumer sentiment suggested that household spending would grow more slowly, a reading consistent with the expected effects of higher energy prices, tighter credit and continuing weakness in housing," Bernanke said.

He made the comments a day after sharp declines in the stock market while crude oil moved closer to an unprecedented $100 per barrel.

The Dow Jones industrial average finished down 360 points on Wednesday and the dollar plunged to a record low against the euro as investors became nervous about the record rise in oil prices, as well as the prospect of a recession in the United States.

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