[PEN-L:275] "Not since 1929"

[Louis Proyect <lnp3@xxxxxxxxx>]

THE GLOBE AND MAIL

MONDAY, SEPTEMBER 28, 1998

BY THE END OF 1999, A RECESSION IN NORTH AMERICA?

The chief economist of RBC Dominion Securities blames flawed global
financial markets

Taken from a speech delivered on Sept 24 at the annual dinner of the
Toronto Society of Financial Analysts.

Paul Summerville

Not since 1929 has the world's financial system, and by implication the
global economy, been at such risk. In the last 12 months the risk premium
in the shares of financial institutions around the world has risen
dramatically. For example, the financial sector sub indice in Hong Kong is
down 52 per cent, in Tokyo 44 per cent, Toronto 42 per cent, Frankfurt 38,
London 36 and New York 32 per cent. Companies like Citicorp are down 52 per
cent, CIBC 50 per cent, Commerz [Germany] Bank 38, Barclays 35 and Royal
Bank 30 per cent.

I believe that the reason for this rout of I global financial sector shares
is that July, 1997, marked the end of an extraordinary eight year period
that began with the fall of the Berlin Wall. The devaluation of the [Thai]
baht [on July 2, 1997] marked the death knell of the widely held view that
American financial capitalism had won a permanent victory.

The belief that openness, transparency and the rule of law would be the
ongoing principles of global financial markets was obliterated with the
recognition that corruption, opaqueness and lawlessness are fundamentally a
part of how many countries, big and small, rich and poor, organize their
capital markets and their civil societies.

The new period we have entered is thus fraught with danger because there is
no overarching agreement on the best way to organize financial markets.
Witness Malaysia's capital controls, Hong Kong's and Japan's use of public
money to buy distressed stocks, and the emerging thesis that it was simply
the availability of global capital that has caused all the recent distress
instead of the existence of corrupt financial markets and regulators. The
new period is also fraught with danger because it necessarily implies a
brutal adjustment in the pricing of financial assets, with a punishing
impact on world economic growth.

I expect that the financial market excess and deteriorating credit quality
which has already caused so much economic pain in the world of late will
also have a pernicious impact on North America. I expect that by the end of
1999, the risk is that America will be in recession, accompanied by Canada,
because North American consumers are levered into a falling stock market
and companies have hired and invested for an economy that does not exist.

This is reflected in our expectation that short term interest rates will be
slashed in the United States by 100 basis points and in Canada by at least
175 basis points by December, 1999, and that long rates will follow. The
Canadian dollar will likely retrace its summer weakness against the U.S.
dollar as the economic consequences for Canada of a U.S. recession become
clear.

We can only hope that the obvious crisis in leadership in the world and the
narrow domestic agendas of scared politicians do not turn an almost certain
recession into a global depression.


Louis Proyect

(http://www.panix.com/~lnp3/marxism.html)