The paralyzed US economy may have some reason to cheer, with President Obama managing to get a massive USD 819 billion stimulus package ratified by the US House. While the bill received a majority thumbs up of 244-188, the point to note is that not a single Republican voted in its favor, while 11 Republicans turned hostile. Politics apart, do the Republicans really believe that the US economy does not need further government stimulus! The stimulus package has a rough break up of 65% towards spending and 35% in tax cuts. Obama plans a different trust for his rescue plan and states that instead of throwing money at problems, money will be invested in what works. If one were to analyze Obama’s statement one can conclude that he may be trying to suggest that his predecessor’s bailout money has been squandered.
Quite coincidentally, George Soros, one of the world’s most successful investors seems to share this view. His opening remarks at the World Economic Forum at Davos seemed to suggest that at least half of the initial USD 700 billion rescue package was frittered away. Ouch!! Or is this just a political statement? Soros further believes that while the entire financial system may not meltdown, the US economy will take at least 10 years to return to its pre crisis rate of growth of 3%. Soros believes that the US banking system needs a financial injection of around 1.5 trillion dollars to recapitalize it, which he thinks is unlikely to happen. In his view, the current stimulus packages are only likely to slow down the rate of decline, but may be unsuccessful in turning the economy around. Soros considers the current economic crisis worse than the Great Depression.
Soros blames the Lehman debacle as a game changing event. With Lehman being allowed to go into bankruptcy, the entire financial system broke down. Continuing with his tirade on how the previous USD 700 billion were utilized, Soros suggests that the approach needs to be widely different. While supporting the good bank/bad bank solution, Soros feels that the capital of bad bank together with its bad assets needs to be kept in the bad bank. The good assets of the bank need to move to a new bank, which needs to be recapitalized by the shareholders or alternatively by the government. Effectively Soros seems to pointing toward the approach of ‘starting with a new slate’.
The Davos summit also seems to have become a platform for others to blame the US as the author of the ensuing global economic crisis. The Russian and Chinese leaders Putin and Wen, both seemed to blame the US for the present state of the global economy. Wen indirectly seems to be blaming the US for the social unrest that his nation may have to face, if its rate of growth falls below 8%. With consumer demand from the US and Europe dwindling fast, the Chinese economy is expected to slow to 6.7% growth rate as per IMF projections. According to Putin, star Wall Street investment banks, posted more losses in the last one year than the profits they made in the last 25 years!!
While the debate at Davos rages….we must all pay heed to Soros talk as his foresight is usually incisive, quite proven by his successful accumulation of wealth.
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