Recession hits US clout

To state that the United States economy is suffering from a steep downturn is an understatement. There is a consensus among most analysts that America is in a recession amid high inflation and rising unemployment.

The subprime woes that began to be felt last summer had their roots in the Federal Reserve policies of Alan Greenspan.

The Fed Chairman's policies, in many ways, led to the bursting of the tec-bubble; and his generous easing of monetary controls to mitigate the effects of his misquided policies, gave birth to the real estate bubble.

When the latter burst, in 2007, the plummeting home values of the American consumer, in turn, led to a pessimism that accelarated the decline in the economy nation-wide.

Not too many economists or political analysts dared to criticise the all powerful Greenspan, but suffice it to say, he was, on numerous occasions, out of touch with what was going on in the country's economy.

Greenspan's successor, Benjamin S. Bernanke adopted his predecessor's failed policies, easing credit restrictions, thus planting the seeds for the present financial crisis.

The invincible Bear Stern was first to fall, leading to a grave credit crunch felt throughout the financial institutions, big and small, in the US and abroad. Lehman Brothers was next to fall and shivers are running in the board rooms of numerous other institutions not knowing who will be the next to fall.

On September 8, US Secretary of the Treasury Hank Paulsen announced the nationalisation of Fannie Mae and Freddie Mac. In essence the government of the United States became the holder of about $5.5 trillion worth of home mortgages.

Paulson defended his actions by stating that it was in the national interest. He said, "...This was about confidence in our financial markets... confidence in our economy and the availability of mortgage financing".

Since the US is still the world's largest economy, its financial crisis is having far reaching repercussions on the global markets and on America's global strategies. Japan's GDP has fallen 0.2 per cent for the second quarter of 2008 and the 15 euro-zone economies reported a decline in their growth rate.

Even China and South Korea are witnessing a decline in economic activity as a result of the economic malaise in America.

Europe's financial institutions seem to suffer the most because of the large amounts of US subprime and real estate holdings in their portfolios. The strength of the euro vis-a-vis the dollar is also a strong negative for the euro-zone economies.

Causing havoc

While the situation in America is causing havoc throughout the world's financial markets, Russia seems to be faring better than ever.

As one of the top oil and natural gas producers in the world, and the major supplier of energy resources to Europe, the soaring price of its energy exports has empowered Russia and allowed it to regain its lost clout on the world stage.

Russia's unshakable and hardened position in the recent events in Georgia and before that in the Ukraine, are a result of Russia's financial strength and America's overextended involvement in Iraq and Afghanistan, coupled with its financial crisis.

Resilient as the US economy may be, there seems to be no end in sight to the financial meltdown the US is witnessing in its financial institutions.

Until the entanglement in Iraq and Afghanistan are honourably ended and the American people elect leaders committed to stop the maddening deficit spending, America will continue to lose its clout in the world.

This is reflected in Russia's harsh response to US warnings on the Georgia invasion. It is also manifest by Iran and Venezuela snubbing their noses at threats by the Bush Administration, not to speak about North Korea's attitude towards the US.

On the domestic scene, the rise of Barack Obama and the losses sustained by the Republicans in Congress, are indicative of the American peoples' disenchantment with the present state of affairs in their country.

John McCain, a Republican, is equally dismayed by the prevailing patterns of deficit spending and government bailouts. McCain, I believe would be more likely to hold down federal spending than would Obama.

But one thing is very clear: regardless of who the next president may be, my children and grandchildren and, possibly, future American generations will be victims of the burgeoning federal debt and the bailout of the culprits of the subprime and housing bubble.

Along with millions of Americans, I am sure America will recover and regain its economic equilibrium.

Sam Zakhem is a former US Ambassador to Bahrain.