Former U.S. Treasury Secretary Robert Rubin says the global economy will be stuck in neutral for quite some time, thanks to the credit crisis and rising commodity prices.
“It’s possible that it could get better during the course of this year,” he told Bloomberg in a recent interview.
“But it’s far more likely that we will have extended difficulties for quite some time yet if you consider what is happening with housing prices, the price of oil and so much else,” Rubin says.
The latest S&P/Case-Shiller index of home prices in the 20 largest U.S. markets fell a record 15.3 percent in April from a year earlier, accelerating from March’s 14.3 percent drop.
Meanwhile, oil prices shot to a new record above $144 a barrel Wednesday, as the government reported a bigger-than-expected drop in U.S. stockpiles and the threat of conflict with Iran weighed on traders’ minds.
U.S. consumer prices surged 4.2 percent in the year through May. The Organization for Economic Cooperation and Development recently cut the growth forecast for its 30 members to 1.8 percent for this year, which would be the slowest rate since 2002.
In the U.S., annual growth averaged an annual rate of only 0.8 percent in the six months ended March 31, the weakest six-month performance in five years.
To spur economic recovery, Rubin says U.S. policymakers should work to make it easier for homeowners to avoid foreclosure on their mortgages.
“One thing we could focus on in the U.S. is legislation that deals with troubled mortgages,” Rubin says. The number of homes lost to foreclosure jumped 35 percent in May from April, to 73,000, according to RealtyTrac.
On another issue, Rubin says it will be difficult to draft international measures to prevent future financial market crises, like the credit market meltdown sparked by the collapse of the subprime mortgage market in the U.S. last year.
The Financial Stability Forum, which comprises senior financial officials from 26 nations, has urged governments to end practices that led to the financial crisis of 2007-08.
But Rubin doesn’t foresee global action anytime soon. “I don’t think we have anything like an agreement,” he says.
“This is going to be a highly political process, and I think this process can only begin once we have elected a president in the U.S.”
Addressing the issue of foreign exchange rates, Rubin says Asian countries should ease restrictions on their currencies, allowing exchange rates to be set by market forces.
“It’s in the interest of all the nations, particularly the Asian nations, to move very carefully toward market-based exchange rates,” he says.
But Asian countries are wise not to move at a “disruptive pace” to free their currencies, he adds.
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