Economy now a global issue

By The Daily Progress

Published: September 10, 2008

With a nationwide mortgage crisis and overall general malaise afflicting the U.S. economy, Americans may be forgiven for ignoring economic events beyond our own borders.

But we’d do well to think about how the U.S. economy affects the global economy — and, especially, vice versa.
That’s what a stellar panel of international financial leaders did this week, meeting in Charlottesville for an economic summit sponsored by the Miller Center of Public Affairs. Participants were current and former financial ministers from many diverse nations.
The economic woes of America, a superpower engine, spill over into the world economy. The current housing crisis and its ripple effects have had an unsettling effect on world markets.

Both Wall Street and world markets rebounded early this week with the announcement that the U.S. government would take mortgage giants Fannie Mae and Freddie Mac into conservatorship.
“It’s a must for the U.S. government,” Jacky Choi, a Hong Kong-based fund manager, told the Associated Press. Failure to act “… would really hurt the global economy and financial system.”
Freddie and Fannie either own or back about half the mortgages in the United States. Of mortgages owned by others, significant numbers are held by foreign investors — including foreign governments that have put money into U.S. markets for safety and growth.
When the threat exists that not only those investments may fail to grow but in fact might be lost in an economic meltdown — well, no wonder the world markets were nervous and no wonder the U.S. government was forced to act.

Although not all foreign economic experts saw the bailout as an unmixed blessing — while, domestically, Wall Street faltered at news of continuing trouble at investment firm Lehman Brothers — the immediate global danger appears to have been diverted. Washing-ton’s pledge to shore up Fannie Mae and Freddie Mac has calmed global markets.
Everything rides on whether Washing-ton can halt further economic deterioration — especially the credit market.
If things continue to slide, foreign inves-tors will cash out, swallow their losses and take their funds elsewhere. New money will be routed to other, more dependable investments.

For some, our sense of patriotism may be affronted at the idea of foreign inves-tors owning U.S. real estate, but the reality is that foreign investment helps spur our own investment. Money circulates; it filters through our domestic economy to stimulate expansion and create jobs.
Losing foreign investment would further damage our economy. We would lose the use of that money and we would lose the investor confidence required to attract new money. Meanwhile, investments would flow to other markets — meaning that our global competitors would benefit from our loss, growing stronger amid our struggles.

Yes, the American economy strongly drives events in the worldwide economy. But it is not a one-way street. Global trends can help or hurt U.S. prosperity.
Having now taken on the risk of backing up Freddie and Fannie, the United States must implement the financial reforms and oversight necessary to stabilize the credit markets and prevent a further decline of confidence and economic value.