Home > Possible U.S. economic downturn draws concern of world’s central bankers
Possible U.S. economic downturn draws concern of world’s central bankers
by Open-Publishing - Tuesday 11 September 2007Possible U.S. economic downturn draws concern of world’s central bankers
By James Kanter
Monday, September 10, 2007
PARIS: The European Central Bank president warned Monday of "hectic behavior" in the global economy and urged central bankers to keep a close eye on the United States for signs of an economic slowdown in the wake of a credit crunch that has rocked global financial markets.
"This is no time for complacency," Jean-Claude Trichet, the ECB chief, said at a gathering in Basel, Switzerland, of the world’s top central bankers, including the U.S. Federal Reserve chairman, Ben Bernanke, and the Bank of Japan governor, Toshihiko Fukui. The current situation "calls for close observation and monitoring," Trichet said.
On Monday, fresh signs emerged that the U.S. economy, the world’s largest, was being strained by a weakening housing market. Janet Yellen, the head of the Federal Reserve Bank of San Francisco, said the current turmoil in financial markets had added to downside risks for the U.S. economy, while an influential group of economists cautioned of a risk that the United States could slide into recession.
The warnings came as President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany stepped up calls for a European mechanism to achieve greater openness in financial markets, an initiative they first raised as trouble in the U.S. subprime mortgage sector threw financial markets into a tailspin in August.
Last week, Trichet kept interest rates unchanged for the 13 nations that use the euro, emphasizing the credit squeeze and financial market turbulence as factors that might dampen the outlook for the European economy.
Economists and bankers say the United States must ride out the turmoil to ensure that other nations avoid a serious downturn. But concerns are mounting over whether U.S. consumption will remain robust enough to keep its economy afloat.
In a speech, Yellen warned that declining home prices could hurt consumer spending, and that risks to economic growth would be heightened if housing prices fell while unemployment rose. She said actions by the Fed to shore up the credit markets had been helpful, but were not a panacea.
In another ominous note for global economic prospects, the International Monetary Fund managing director, Rodrigo de Rato, said of the crisis that the "main bulk of the consequences should be in the U.S. economy," and he warned also that some of the Fund’s 2008 economic growth would be lowered, reflecting the impact of financial market turbulence.
In Europe, where the crisis already has had concrete repercussions - including a government-led bailout of a German bank, the sale of another state-owned German lender, and the temporary freezing of funds managed by the French bank BNP Paribas - Sarkozy said he would not accept speculative "predators" making profits at the expense of "hundreds of thousands of jobs."
Merkel, speaking at the same meeting as Sarkozy in Meseberg, Germany, called for a joint European effort to seek to seek "fair conditions" in the transparency of international financial instruments.
The two leaders said they expected final decisions on closer supervision of hedge funds and ratings agencies at a spring summit meeting in 2008 and would make the issue a top priority under the Portuguese presidency of the European Union next year.
Analysts are watching all corners of the U.S. economy for signs that heavily indebted consumers - usually a motor of growth - are pulling back. In recent weeks, auto companies and Wall Street analysts have reduced their forecasts for auto sales because of a combination of factors, including high gasoline prices, consumer uncertainty and the crisis facing mortgage lenders.
Last week, Robert Nardelli, the chief executive of Chrysler, said he was concerned that problems in the housing market and the broader economy were hurting car and truck sales. He said Chrysler was trying to anticipate what might await the industry, whose sales this year are expected to be the worst since 1998.
Trichet and other central bankers are treading a difficult line over fallout from the sub-prime lending crisis in part because financiers these days use an increasingly complex toolbox of financial instruments to manage risk.
Central bankers have been intervening by pumping huge quantities of low-cost money into the financial system to stave off a prolonged economic slowdown and reassure battered markets. At the same time, central bankers are seeking to avoid giving signals that reckless risk-takers will be bailed out if their investments are sufficiently big to pose a threat to the wider economy.
The proper role for central banks is to ensure the "correct functioning of the money market" and keep close tabs on inflation, Trichet said, but he added that it was not their role to rescue investors who had made risky bets.
"Bailing out bad investors would be the worst thing to do," Trichet said.