Goodbye to the Bulls?

'Innocent Victims'
Robert J. Shiller
It's no surprise that the subprime debacle is continuing to fuel last week's market turmoil. The world is currently emerging from the biggest real-estate bubble in more than 100 years. Perhaps the best historical analogy to today's situation is the bubble that developed and deflated throughout the 1920s and '30s. In the four years leading up to 1925, there was a 19 percent increase in real home prices, and then prices fell 13 percent from 1925 to 1932. In comparison, from 1997 to 2006 there was an 85 percent increase in real home prices, followed by a fall of less than 10 percent so far. The 1920s bubble was due in part to a euphoria driven by a technology boom, including the advent of radio and the mass production of the automobile. As people began to drive, there was a sense that the world would run out of land. Resort areas like Florida, now accessible by car, boomed. Then, as now, there was also an explosion of easy credit. In fact, mortgage defaults were a substantial part of the Great Depression. One crucial difference: the government back then did a lot more to cushion the fallout, instituting major public programs to bail out homeowners. By comparison, the Bush administration has done very little. To me, that's a problem. The idea that we should simply let average citizens take the pain seems unjust--there are a lot of innocent victims of the subprime debacle. I think we need more substantive public-policy responses to the crisis. In the future, there should also be safeguards against mass defaults. People need more protection.

Shiller is a professor of economics at Yale University and a cofounder of MacroMarkets LLC.

'Losing Momentum'
Jim O'Neill
I've spent most of this decade writing about the strengths of the major developing countries, but this year I'm not so sure. Sure, the big picture is still bright for Brazil, Russia, India and China, the emerging-market powerhouses known as BRICs. Look a bit closer, though. The key word is "valuations." There's been just a persistent, fantastic increase in emerging-market assets, driving expectations of even more-incredible gains. But assets in China and India aren't cheap anymore. That means these countries are vulnerable to any kind of disappointing news.

But what about decoupling--the notion that thanks to booming demand from China, the emerging markets can get by and perhaps even flourish in the teeth of a downturn in the United States? Not quite yet. It's one thing to talk about China and the world decoupling when the United States was growing just below the trend, as in 2007. But that's almost impossible in a recession. The United States is 30 percent of the global economy, and China is only 7 percent. For now, I'm betting on recoupling. The world cannot ignore a U.S. recession. What's more, the latest data make it pretty clear that China is losing some momentum. China and the United States represent 55 to 60 percent of global growth. You don't need to do much math to know that the emerging markets are not the place to be this year. On a selective basis, perhaps. But for a while, at least, I'd say maybe it's time to give BRICs a bit of a rest.

O'Neill, a senior economist at Goldman Sachs, specializes in emerging markets.

'A Return to Growth'
Holger Schmieding
First the seizing up of money and credit markets, now the mini-crash in stock prices. The twin shocks will hurt economies around the world. But Europe is relatively well placed to deal with the fallout and rebound afterward. The credit upheaval makes it more difficult to borrow. Fortunately, many European companies are well capitalized and do not depend on easy credit for much of their growth. Most households in the 15 euro countries rely less on loans to finance purchases than consumers in the United States and the United Kingdom.

The same goes for the stock-market gyrations. Major European markets have fallen by roughly 14 percent this year. In unsettled markets, companies may find it more difficult to raise capital, and may shy away from building plants or hiring workers, but this is not yet happening in Europe. Last week, with markets plunging, business confidence improved slightly in Germany and held steady in France. Lower stock prices can also discourage consumer spending, but this effect is smaller in Europe than in the United States. For every dollar lost on the markets, Americans reduce their consumption by 2 cents, Germans and French only by 1 cent.

Bottom line: euro-zone growth will probably fall far below its 2 percent trend rate in early 2008. Stagnation is a serious risk. But the setback should be temporary. Most European domestic fundamentals are sound. The chance that the external shocks will fade later this year also supports our view that the euro zone can return to substantial growth in late 2008.

Schmieding is head of European economics at the Bank of America.

'Tug of War'
Mohamed A. El-Erian
Bond and equity markets swung widely last week as concerns about a U.S.-led global downturn gave way to excitement that policymakers were finally responding. What are global investors to make of all this volatility? First, it speaks to the tug of war between worrisome economic and financial trends and corrective policy moves. Second, it highlights differences in the reaction speed of market participants and policymakers, both of which are navigating an extremely fluid situation. Finally, and most important for the longer term, it illustrates the extent to which market and policy infrastructures have failed to keep up with the range of activities enabled by global economic transformations and financial innovations.