Friday, February 1, 2008

Now, it's the whole world's turn to save the US

AMAZING, how policy prescriptions change when the shoe is on the other foot. The policy prescriptions to solve the economic problems in the United States today are the exact opposite to those recommended to Asian countries in 1997-1998.

During the Asian financial crisis, the affected developing countries were asked to tighten fiscal policies, increase interest rates, impose austerity measures, cut back on subsidies and close banks with problem loans. It was argued that these measures were necessary and critical to prevent "moral hazard" and contain the contagion.

Now that such problems are affecting the world's largest economy, as a result of the subprime mortgage crisis, the policy prescription is for looser fiscal expenditure, reduced interest rates and aggressive economic stimulation.

Dominique Strauss-Kahn, the managing director of the International Monetary Fund (IMF), and Larry Summers, the former US deputy treasury secretary, called for relaxation of fiscal policies to stimulate the economy.

This is the opposite of what was prescribed to Asian economies, which were tighter fiscal policies. It did not matter then that the prescriptions and the "one-size-fits all" and "cookie-cutter" policies were tantamount to "screaming fire in a packed cinema hall", with investors seeking the first and nearest exit and "flight to safety".

The irrational behavior and the IMF's stringent and bitter pill brought the "ambulance to the front door and it sent people running", causing even more destruction, according to Jeffrey Sachs, then director of Harvard University's Centre for International Development.

The cure and conditions imposed were not commensurate with the disease. They made the problem even worse and led to "creative destruction" in the region. Read the rest of Hardev Kaur's column here.

LATEST DEVELOPMENT(S): The US Senate failed Wednesday to advance its own version of an economic stimulus program, boosting the odds for a White House-backed version approved last week by the House of Representatives. The economic stimulus plan proposed by President George W. Bush has failed to find enough support in the Senate. By a single vote, Senate Republicans on Wednesday, 2/6/08, blocked an expansive fiscal stimulus package championed by Democrats, as partisan rancor engulfed the effort to inject a quick burst of spending into the slowing economy. Read the rest of nytimes’ report here.

Thursday, 2/7/08 02:10 PM ET- Economic Stimulus Plan Divides Democrats: Republicans said they didn’t block the proposal, they said, "We just said there's a better way to go and there's an alternative." And Democrats said, "There's no reason for any more delay on this." House Speaker Nancy Pelosi, D-Calif., siding with Republicans on an economic stimulus package, called on the Senate Thursday to stop its infighting and pass a bill that would add checks for 20 million seniors. With the Senate in a procedural and political tangle over a bill to pump up the economy with tax rebate checks, Pelosi, D-Calif., has sided with the White House and GOP Senate Leader Mitch McConnell of Kentucky in efforts to limit Senate add-ons to the House-passed stimulus bill. In doing so, Pelosi, D-Calif., is splitting openly with Senate Majority Leader Harry Reid, D-Nev., who's backing a more expensive package.

Thursday 2/7/08 04:02 PM ET - Stimulus Breakthrough in Congress: Democrats Drop Some Demands to Pass Bipartisan Measure ---- After Republicans had narrowly blocked a larger, more generous economic stimulus package in a vote that brought the Democratic presidential candidates scurrying to Washington, lawmakers came together Thursday around a stimulus plan hashed out in January between House leaders on both sides of the aisle and President Bush. Senators are expected to vote later this afternoon on an amendment to add benefits for as many as 21 million seniors and 250,000 disabled veterans to the $146 billion House proposal, at a cost of an extra $9 billion over two years.

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