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Guard Against the Influence Brought by Subprime Landing Crisis | EurOrient --Ron Nechemia

Guard Against the Influence Brought by Subprime Landing Crisis | EurOrient --Ron Nechemia

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Published by Ron Nechemia
Following the publication of two prior question- and-answer-style interviews, the first given by Mr. Ron Nechemia for International Finance Magazine published in May 2008 in an article titled, Guard Against the Influence Brought by Subprime Landing Crisis, at which time Mr. Nechemia announced that he saw a systemic financial crisis brewing and warned that in the months to come the United States was likely to face a once-in-a-lifetime financial crisis, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. In that article he also foretold of homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt.
Following the publication of two prior question- and-answer-style interviews, the first given by Mr. Ron Nechemia for International Finance Magazine published in May 2008 in an article titled, Guard Against the Influence Brought by Subprime Landing Crisis, at which time Mr. Nechemia announced that he saw a systemic financial crisis brewing and warned that in the months to come the United States was likely to face a once-in-a-lifetime financial crisis, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. In that article he also foretold of homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt.

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Published by: Ron Nechemia on Dec 06, 2010
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International Financing
2008 JUNE ¦
35
G
uard Against the Strong In
uenceBrought by Subprime Lending Crisis
Mr. Ron Nechemia is a member of UnitedNations Investment Advisory Council(UNCTAD/ICC), he is also the member of theAdvisory Committee to the Organization forEconomic Co-operation and Development(OECD) and a member of China Sub-committee on WTO and Advisor to the G77+ 1. As a highly successful entrepreneur, hehas a unique vision on the global
nanceintegration brought about by new challengesand opportunities faced by the internationalcommunity. “International Finance Magazine”interviewed Mr. Nechemia on the issueof the in
uences on the global economyinstigated by the subprime mortgage crisis.He believes the in
uence on the globaleconomy by the subprime mortgage crisisit is just the beginning and that we must paycareful attention to it.
 IFM: Can you share with me your views about the subprimemortgage market crisis in theU.S.?
Mr. Nechemia:
The global expan-sion is losing speed in the face of amajor
nancial crisis. The slowdownhas been greatest in the advancedeconomies, particularly in the UnitedStates, where the housing marketcorrection continues to exacerbate
nancial stress. Among the otheradvanced economies, growth in West-ern Europe has also decelerated. Theemerging and developing economieshave so far been less affected by 
nan-cial market developments and havecontinued to grow at a rapid pace, led by China and India, although activity is beginning to slow in some countries.The
nancial shock that erupted in August 2007, as the U.S. subprimemortgage market was derailed by thereversal of the housing boom, thenegative impact has spread quickly and unpredictably to in
ict extensivedamage on markets and institutions atthe core of the
nancial system.The fallout has weakened capital ad-equacy at major banks, and promptedthe re-pricing of risk across a broadrange of instruments. Liquidity remains seriously impaired despite ag-gressive responses by major central banks, while concern about creditrisks has intensi
ed and extended far beyond the subprime mortgage sec-tor. Equity prices have also retreatedas signs of economic weakness haveintensi
ed, and equity and currency markets have remained volatile. At the same time, in
ation has in-creased around the world, boosted by the continuing buoyancy of foodand energy prices. In the advancedeconomies, core in
ation has edgedupward in recent months despite slow-ing growth. In the emerging markets,in
ation has risen more markedly,re
ecting both strong demand growthand the greater weight of energy, butparticularly food in consumption bas-kets.
 IFM: What are the other driver(s) that in
 fl 
uence theglobal economy and introduce further economic instabilities?
Mr. Nechemia:
High food pricesare threatening recent gains in over-coming poverty and malnutrition, andare likely to persist over the mediumterm. Poor people are suffering daily from the impact of high food prices,especially in urban areas and in low income countries. In some countries,hard-won gains in overcoming poverty may now be reversed.For many countries and regions whereprogress in reducing poverty has beenslow, the negative poverty impact of rising food prices risks underminingthe poverty gains of the last 5 to 10 years, at least in the short term. Forexample, in the case of Yemen, esti-mates show that the doubling of wheatprices over the last year could reverseall gains in poverty reduction achieved between 1998 and 2005. While the urban poor are most af-fected, it is worth remembering thatmost rural people are buyers ratherthan sellers of food. There could well be severe effects for landless rural workers whose subsistence wages may not increase apace with food prices.The impacts of the recent surge infood prices are reverberating acrosskey dimensions of the developmentagenda, including poverty alleviation,macroeconomic stability, investmentincentives and energy security/climatechange policies. Because it is capable
Given By: Mr. Ron Nechemia, the Chairman of Board of EurOrient withMrs. Luyang Li, Editor-in-Chief from International Finance Magazine on May 16, 2008.
 
FORUM
36
¦ 2008 JUNE
of weaving together the economic, poverty,social, agricultural and environmental per-spectives, we need to catalyze global actionand in
uence the international agenda.China can contribute greatly to this end andseek to improve global outcomes, many of  which are of direct consequence for middle-income countries.
 IFM: What is your suggestion toovercome these issues and obstaclesin the face of such crisis?
Mr. Nechemia:
I called for action totackle hunger and malnutrition in a worldof rising food prices. Relieving people fromhunger and malnutrition are at the heart of the Millennium Development Goals (MDG).It has gotten less attention, but increasedfood prices and their threat – not only topeople but also to political stability – havemade it a matter of global urgency to draw the attention it needs.
 IFM: How severely does the sub- prime mortgage market crisis in theU.S. in
 fl 
uence the global economy?
Mr. Nechemia:
Global growth isprojected to slow to 3.7 percent in 2008.Moreover, growth is projected to remain broadly unchanged in 2009. The divergencein growth performance between the ad- vanced and emerging economies is expectedto continue, with growth in the advancedeconomies generally expected to fall well below potential.The U.S. economy will tip into a mild recessionin 2008 as the result of mutually reinforcingcycles in the housing and
nancial markets, before starting a modest recovery in 2009 as balance sheet problems in
nancial institu-tions are slowly resolved. Activity in WesternEurope is also projected to slow to well below potential, owing to trade spillovers,
nancialstrains, and negative housing cycles in somecountries. By contrast, growth in emergingand developing economies is expected to easemodestly but remain robust in both 2008and 2009. The slowdown re
ects efforts toprevent overheating in some countries as well as trade and
nancial spillovers andsome moderation in commodity prices
 IFM: What is the overall balanceof risks to the short-term globalgrowth?
Mr. Nechemia:
The overall balance of risks to the short-term global growth outlook remains tilted to the downside. Growth willdrop to 3 percent or less in 2008 and 2009equivalent to a global recession. The greatestrisk comes from the still-unfolding events in
nancial markets, particularly the potentialfor deep losses on structured credits relatedto the U.S. subprime mortgage market andother sectors that would seriously impair
nancial system balance sheets and causethe current credit squeeze to mutate into afull-blown credit crunch.
 IFM: How does the subprime mort-gage market crisis in the U.S. impact China, and the rest of the world?
Mr. Nechemia:
Two forces—
nancialmarket turmoil, and the sharp rise in energy and commodity prices—have combined overthe past year to push the global economy off the path of solid growth and low in
ationthat had prevailed since 2003. Growth inall of the G-7 economies will have slowedto a below-trend pace by this year’s
nalquarter, while headline in
ation will exceedmonetary policymakers’ medium term goals.Moreover, growth in emerging economies will slow as well, even though their averagegrowth pace will remain substantially fasterthan in the advanced economies.One of keys to successful global recovery isto restore US growth to a trend pace. Persis-tently weak US growth would signi
cantly inhibit a return to trend growth in other ad- vanced economies, and could underminegrowth in emerging economies as well.Restoring US growth will require, amongother things, an end to the price declinesin US residential real estate that are stillunderway. It also will require the return tomore normal conditions in credit markets,and a restoration of consumer con
dence. Attaining these results primarily are the re-sponsibility of the US authorities. However,restoring a sustainable global expansion—that is, trend growth accompanied by low and stable in
ation and by declining globalimbalances—will require stronger domesticdemand growth in the advanced economiesoutside the US.Despite widespread concerns about the dol-lar’s recent decline versus some currencies,the US currency is at present only at—orslightly stronger than—its medium-termequilibrium on a broad trade-weighted andin
ation adjusted basis. As is well known,this conclusion re
ects the United States’substantial ties with Asian and other econo-mies whose currencies are undervalued.
 IFM: How should China deal withthe sub-prime loan crisis?
Mr. Nechemia:
Policymakers makersin China and elsewhere should be ready to respond to a more negative externalenvironment, which could undercut tradeperformance and sti
e capital in
ows. Inmany countries, strengthened policy frame- works and public sector balance sheets willallow for more use than in the past of coun-tercyclical monetary and
scal policies. InChina, the consolidation of the past several years provides ample room to support theeconomy through
scal policy, such as by accelerating public investment plans andadvancing the pace of economic reformsin order to strengthen social safety nets,promote better health care, and improveeducation system.Emerging and developing economies facethe challenges of controlling in
ation while being alert to downside risks from therapid slowdown in the advanced economiescoupled with the increased stress in
nan-cial markets. In some countries, furthermonetary policy tightening may be neededto keep in
ation under control. In the caseof China, more
exible exchange rate policy and currency appreciation will tend to pro- vide useful support for monetary tightening.Countries whose exchange rates are heavily managed in relation to the U.S. dollar haveless room to respond because rising interestrates may encourage heavier capital in
ows.China and other countries that have diversi-
ed economies would bene
t from movingtoward more
exible regimes that wouldprovide greater scope for monetary policy.
 IFM: In the face of the U.S. sub- prime mortgage market crisis, is nowa good time for Chinese enterprisesto make overseas investment? And,which is bigger, the opportunity or the crisis?
Mr. Nechemia:
Global economic in-tegration is not a new phenomenon. Somecommunication and trade took place be-tween distant civilizations even in ancienttimes. Since the travels of Marco Polo sevencenturies ago, global economic integration—through trade, factor movements, and

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