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The financial crisis comes back to bite us

By Li Hong (People's Daily Online)

16:28, August 05, 2011

The sudden bout of the Wall Street Thursday and stock market plunges elsewhere speaks it out: the global financial crisis, though receding in 2010, is haunting us again.

The market’s fear of sputtering economic engines in the United States, Europe and Japan is thickening, exacerbated by the just-concluded political fight in Washington to cut drastically government spending when the anemic U.S. economy needs it most.

And, previously hidden jitters about spread of fiscal woes in Europe, from Greece, Ireland and Portugal to Spain and Italy, has never abated, and it is increasingly likely that bigger euro-zone countries will ask for bailouts, if they do not default on debts.

The origin of problems remains with people’s “exuberance” of rushing for bubbling equities and fortunes among the developed economies in the early years this millennium. Governments’ complacence and regulators’ negligence – including U.S. Federal Reserve’s extraordinarily low rates to fire up American houses and stocks – are central cause of all economic troubles.

When the sub-prime mortgage takers, who should not have been given a cheap loan in the first place, failed to pay back, the dominos fell bringing banks and financially feeble governments down. Some in Europe haven’t seen a light in the tunnel.

Yesterday, the Dow Jones industrial average fell 512 points, its ninth steepest drop. Friday, stocks in Japan and Hong Kong lost more than 4 percent, and China’s Shanghai composite index lost nearly 60 points or 2.2 percent. More bleeding is to be expected in the coming days.

Ask any head-shaking investors, and they would tell you they were awed by the wild stampede to sell off holdings, a scene reminiscent of the wild swings that defined the peak of the crisis in September 2008. In just two weeks, up to $1.9 trillion in market value has evaporated at Wall Street.

The Federal Reserve and other central banks in the developed countries will soon ease monetary policy letting printing houses churn out trillions of paper currencies – so-called “quantitative easing” – to drag down market rates and deflect deflation. The results are known to us – a short-time normalcy of life, but once the oxygen respirator is taken away, all the previous ill symptoms come back.

Like 2008, China and other emerging economies could not insulate them from another recession in the developed West. However, they are endowed with strong fundamentals – less debts and a rising middle class willing to spend – so they are expected to weather a crisis better.

For China, it is wise for authorities in Beijing to clamp down hard on ever-surging housing prices in early 2010 and prevented a dangerous property bubble from enlarging. It has learned from the downs of the developed economies.

Next, China’s central bank is expected to halt the streak of raising interest rates to spur private growth and investment at home. But, it will face an even harder job to hold back inflows of hot money – released by Western central banks, and may have to be prepared to elevate banks' required reserve ratios to prevent a credit flood from wrecking havoc in the country.

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