US Economy and Asia

Full-length Channel NewsAsia interview with Prof. Dr. Kai-Alexander Schlevogt, NUS Business School, Department of Business Policy

Executive summary
Dr. Kai-Alexander Schlevogt, a management professor at the NUS Business School, speaks to Channel NewsAsia anchor, Melvin Yong, about the potential impact of the slowing US economy on Asia.

Melvin Yong (Channel NewsAsia anchor): And our guest tonight, Dr. Kai-Alexander Schlevogt, who’s the Associate Professor of Management Practice at the NUS Business School. Kai, thanks very much indeed for your time. You know, you heard Ben Bernanke talking about the US economy. Now, many analysts are saying that the US economy is already in recession at this point in time. What do you make of Ben Bernanke’s comments?

Prof. Dr. Kai-Alexander Schlevogt: I think we should not read too much into the comments; they are political comments. I think it’s very important to look into the facts, and what I see is that the government and the Fed are doing more of what actually caused the crisis in the first place. We’re seeing a 152 billion dollar stimulus package. There will be more help for distressed homeowners. So the message is: ‘You can take on a risky loan, the government will help you.’ There’s a reduction in interest rates, which will increase credit in the economy. Investment banks can now take out loans from the Fed - this is also new. So, there are all these factors which create more inflation. And there was a bailout by the Fed of Bear Sterns; it took off $29 billion from the balance sheet there. There will be more mortgages. So what I see is the specter that the government actually tries to inflate away some of the debt in the system.

Interviewer: You know, the big question now is how long this potential recession in the US is going to last and, of course, the Fed Chairman is saying that things may pick up in the second half. Where do you stand in this debate?

Schlevogt: I think because of these systemic issues and because of the policies which continue to put more credit into the system and increase inflation, the problems will actually persist. I think that the right solution would be for the finance sector to sort out the problems itself and pay for them. I think this is very important!

Interviewer: Yeah, you know, talking about the financial sector, Lehman Brothers and UBS, they’ve both gone to the market for funds - for capital to try and shore up their balance sheets. Now, some are saying this is not the end of the road yet for them. Do you think more is going to come out in the foreseeable future?

Schlevogt: You know, one problem is that now all the banks use the opportunity to write off all the bad debt they have, whether it is subprime or not. And, when a new CEO comes in, he wants to make the situation look very bad, so that he can afterwards show a stellar performance. So if we see new CEOs coming in, we will see more of this kind of problems. Further, up till now, it’s impossible to value these mortgage-based securities. So nobody will buy them! They are fictitious, in a sense, on the balance sheet. Also, there is a problem of lack of transparency. Until 24 hours before Bear Sterns were to file bankruptcy, they didn’t know about it, and the SEC didn’t know about it. This is very strange!

Interviewer: Now, what are the implications for Asia though, I mean, seeing all these things are going on in the US. Other than the US economy, Asia has to contend with rising prices of food and fuel at the same time.

Schlevogt: Okay, we’ve already seen a strong impact on the export sector. The consumer goods exporters in Thailand, the Philippines, Malaysia and even China are hit. When you talk to Singaporean exporters, they also report problems. The shareholders are hit - the Shanghai market is down 40 percent since October. Other contagion is also happening here in Asia. Bondholders are hit because of the inflation and, of course, consumers as well.

Interviewer: And are there options for governments to get out of this problem that they are facing?

Schlevogt: Yes, first of all, the Singapore government, for example, should not try to provide a cushion to soften the impact by giving handouts to people, because this will increase inflation. It should orientate itself more to Asia: more investment, more exports, more consumption should be driven by Asia. I think this is very important! Also, you have to be very careful about letting in American banks now. You have to regulate them. And I would review the trading band with the dollar, because now it contributes to the inflation, which is imported partly.

Interviewer: Okay Kai, good to talk to you. Thank you so much indeed for coming in today. Kai-Alexander there is from the NUS Business School.