The financial storm that blew up in America's subprime mortgage market last year has become a hurricane.

The financial storm that blew up in America’s subprime mortgage market last year has become a hurricane.
As reported by Economist.com, the ill wind from reckless property lending blasted first the market in asset-backed securities, then banks’ balance sheets and, most recently, stock markets. Across the globe, more than $5 trillion disappeared from the value of public companies in the first three weeks of January. Many markets are 20 percent or more below their highs, the informal definition of a bear market. On January 21st share prices plunged from Brazil to Britain in the worst day of trading since September 11th 2001.
Although America’s exchanges were closed that day, its policymakers’ response was more than commensurate. Before Wall Street opened on January 22nd the Federal Reserve announced an unscheduled rate cut of three-quarters of a percentage point, to 3.5 percent, its fastest easing in a quarter of a century. A day later the New York insurance regulator and leading banks began work on a multibillion-dollar plan to rescue the country’s teetering bond insurers. As the markets pitch and yaw, the pressing question is whether central bankers and regulators have acted with swift prudence, or ill-judged panic.
There is no doubt that this is a frightening moment. But the narrow economic rationale for the Fed’s emergency rate-cut this week was thin. America’s weak economy means monetary policy can, and should, be loosened considerably. But the central bankers’ next scheduled meeting begins on January 29th.
Since lower interest rates take several months to work through the economy, accelerating rate cuts by a few days will not much affect the outcome. Yes, share prices had been falling sharply across the globe, but the slide was orderly and the system had not seized up. The Fed seems to have been spooked, and wanted to stop the markets’ fall.
That is a dangerous path for a central bank to tread. Its success will now be identified with short-term movements on Wall Street. Indeed, as the stock market shrugged off the latest rate cut, the Fed’s authority already looked diminished. As if to prove the point, shares soared only when the insurance regulator appeared. Ben Bernanke, Fed chairman and guardian of America’s economy, moved Wall Street less than Eric Dinallo, whom nobody had heard of, saying he would rescue some insurers nobody understood.
Rather than chasing the market’s tail, the Fed ought to be asking what the markets’ fall really signals. The answer is: unsurprising judgments that should not have led it to panic.
For much of last year, stock markets ignored the bad news from the credit markets, thanks to three assumptions. First, that policymakers, led by the Fed, would avert recession in the United States. Second, that even if America stumbled, the rest of the world economy was “decoupled“ and would carry on growing healthily. And third, that the credit mess would be confined to areas related to subprime mortgages.
These assumptions were always over-optimistic. America’s economy has stalled as the building bust deepens and consumers cope with the triple whammy of falling house prices, tighter credit and dearer oil. The labor market is weakening at a pace that has in the past heralded recession. The rest of the world, meanwhile, is slowing. Europe’s outlook has darkened. Its banks are embroiled in the credit crisis; and one of them, SociŽtŽ GŽnŽrale, has lost $7.1 billion in a fraud. Japan is weak; even turbo-charged China may cool.
And the credit crisis has continued to spread. Corporate lending and parts of consumer credit, such as credit cards and car loans, are wobbly. The looming downgrades--and possible bankruptcies--of the “monoline“ insurers of some $2.4 trillion of bonds boded worse until Dinallo moved.
They would have hurt states and municipalities that are their biggest customers; and banks that had bought insurance in credit-derivative trades would also have been hit. A further round of losses at the banks could have been catastrophic. With the system at risk, no wonder stock markets swooned.

Suharto is credited as the chief architect of Indonesia's extraordinary economic boom, which saw average GDP growth of 7 percent for over three decades.

As Indonesians debate Suharto’s legacy--he died on Sunday, January 27--some will undoubtedly place his New Order government’s undisputed economic accomplishments above and beyond the unresolved charges of embezzlement and human rights abuses that followed the former strongman leader to his grave.
According to Atimes.com, editorial pages have been full of letters, alternatively praising and condemning the former president. The critical missives concentrate on criminal corruption charges, dropped on January 8 after his hospitalization, where the attorney general has accused Suharto of embezzling more than $1 billion through a charitable foundation during his rule. A civil case is still pending.
Many others have hailed the economic stability and prosperity his government ushered in, beginning with stabilization of runaway inflation in 1966, roaring economic growth through the 1970s, 1980s and early 1990s, and ending in 1998 with the sharp economic collapse that coincided with the 1997-98 Asian financial crisis and marked the end of his 32-year rule.
Suharto, an independence fighter and later Cold War warrior against the spread of communism, perhaps more significantly is credited as the chief architect of Indonesia’s extraordinary economic boom, which saw average gross domestic product (GDP) growth of 7 percent for over three decades.
On taking power after a still controversial coup attempt in the mid-1960s, Suharto restored economic ties with the West, he opened the economy to foreign investment and set up a series of five-year development plans with economic growth targets. Turning his back on the anti-Western rhetoric of his left-leaning predecessor Sukarno, Suharto welcomed Western investors and liberalized investment rules to encourage capital inflows.
Perhaps most importantly he appointed a brain trust of mostly US-trained economic advisors, the so-called “Berkeley Mafia“, as several had PhDs in economics from the US university, to lead his economic reform program.
Suharto referred constantly in speeches to his New Order regime’s economic development achievements. Indonesia’s per capita income rose from $50 in 1967 to $650 in 1996, two years before the authoritarian leader’s downfall. Adult illiteracy rates were cut by two-thirds over the same period, while life expectancy rates increased by a whopping 20 years.
Agricultural experts gave the early Suharto regime high marks for boosting food production, particularly through the introduction of so-called “green revolution“ technologies including higher-yielding varieties of rice. Some subsequently criticized his government’s full-embrace of the western-hatched techniques, arguing they often disrupted local social structures and had a negative environmental impact. Yet food security, particularly for the key commodity of rice, improved significantly.
Indonesia was also hailed as a global success in the area of family planning, reducing the population growth rate from high levels in the 1960s, to about 2 percent by the mid-1990s. Suharto often claimed this was the result of his government’s two-children only family planning program while academic demographers judged that the country’s fast growing economy made it less attractive for women to bear large families.

Ministers from India, Brazil and South Africa warned at the Davos World Economic Forum on January 26, that the success of Doha trade negotiations over the next couple of months will depend on “balanced commitments“ between agriculture and opening of markets for industrial products.
The three ministers said they are ready to conclude by April the modalities (parameters) that would indicate the magnitude of required tariff and subsidy cuts in agriculture and tariff cuts in industrial products.
But the success of these modalities, they said, will hinge on the “balance“ between what the two chairs for Doha agriculture negotiations and opening of markets for industrial goods will propose in their revised draft texts expected by February 6, Ipsnews.net reported.
At a closed-door informal ministerial meeting convened by the Swiss government, the three countries said they will only accept a balanced agreement.
“We have conveyed a clear message that if the revised draft text on market-opening for industrials does not adequately reflect our concerns and include the figures we had suggested in our proposals, then it would be difficult to accept an agreement,“ South African Trade Minister Mandisi Bongani Mabuto Mpahlwa said.
“The previous draft modalities text on industrial goods ignored all our major concerns, and this time around we don’t want to see a text that is one-sided,“ he said.
Brazil’s Foreign Minister Celso Amorim said “there is quite a sizeable difference“ between what was proposed in the previous draft text on industrial goods and the unfinished text on agriculture, suggesting that there is a major imbalance that needs to be addressed.
He said that the previous draft text on agriculture left several big issues relating to subsidy and tariff cuts for farm products in industrialized countries unaddressed, while the draft on industrial goods presented a “final product“ which set high ambitions without even knowing the outcome in agriculture.
“If negotiations have to proceed smoothly in the coming months, there have to be balanced revised draft texts in both areas,“ Amorim told reporters at a press conference.
At issue is whether developing countries should make ambitious commitments to reduce their industrial tariffs without proportionate effort in industrialized countries to reduce farm subsidies and tariffs.
“We don’t know what is going to be the outcome on the subsidy cuts where a member (the United States) has a range of between 13 and 16.4 billion dollars to reduce its farm subsidies, and it is quite a sizeable difference between the two figures,“ the Brazilian minister said. “But developing countries are being told what to do precisely in cutting down tariffs on industrial goods.“
But, he said, “there is a necessity for concluding the Doha Round given the current economic climate, and I am still hopeful that we will be able to do it.“
With fears growing of a global economic recession, there is clear recognition at the WEF meeting in Davos of the need to conclude the much-delayed Doha Round by the end of this year.
The Doha Round was launched in 2001 on the promise that developing countries will be provided a “development“ dimension in global trade, but key developing countries like India maintain that the round has been converted into a pure market-access round.

The South Stream project is aimed at countering the US and EU backed Nabucco pipeline that aims to reduce Europe's dependence on Russian gas.

Russia and Serbia signed a “strategic“ energy deal on Friday, January 25.
“Serbia will become a key hub in the prospective network of Russian energy supplies to southern Europe,“ Russian President Vladimir Putin said after the signing ceremony in Moscow.
Serbian President Boris Tadic and Prime Minister Vojislav Kostunica, who both attended the ceremony, said the deal is of strategic importance to Serbia.
“The deal will strengthen Serbia’s strategic position in southeastern Europe, since it will serve as a transit point for gas supplies to the EU’s southern flank,“ Tadic said.
According to AP, apart from building a branch of a natural gas pipeline from Russia via Bulgaria, Serbia and Italy to Europe (the so-called South Stream), Serbia will see construction of a giant gas storage near the town Novi Sad. It will also get supplies for its strongly growing industry.
The deal included sale of Serbia’s jewellery and its oil and gas giant, the Oil Industry of Serbia (NIS), to the Russian company Gazprom for $600 million, with another 750 million dollars to be invested until 2012. Gazprom is to have a 51 percent stake in NIS.
This part of the deal has raised protests in Serbia, where experts and independent institutions put the price of monopolist NIS at between 2.25 and 3.75 billion dollars. The company was due to be sold by tender, and the government has been much criticized for its non-transparent negotiations.
NIS was priced only $90 million higher than Department Stores Belgrade, a retail giant of former Yugoslavia with dozens of outlets. The property and size of the two companies defy comparison.
“Despite all the talk of covering the growing need for gas in Serbia, this deal has another side,“ analyst Misa Brkic said. “Serbia has surrendered its energy independence to Russia. It has also opened the door for the political influence of Russia.“
Belgrade is strongly backed by Moscow in its refusal to accept independence of Kosovo, the ethnic Albanian populated southern province. Kosovo has been run by the United Nations (UN) since 1999. With the imminent proclamation of Kosovo independence, Belgrade has turned to Russia, its lone powerful ally.
“Russia is categorically against a unilateral declaration of independence for Kosovo,“ Putin reiterated at the talks with Tadic and Kostunica ahead of the signing of the Gazprom-NIS deal. “It could seriously damage the system of international law and have negative consequences for the Balkans, and affect stability in other regions.“
Government officials tried to play down criticism of the deal. “The deal provides long-term energy stability and sustainability of Serbia and the Balkans,“ foreign minister Vuk Jeremic said in Moscow.
The South Stream is an 880 km and $15 billion project aimed at countering the US and European Union backed Nabucco pipeline that aims to reduce Europe’s dependence on Russian gas. The planned Nabucco pipeline will transport natural gas from Turkey to Austria via Bulgaria, Romania and Hungary.