Wolfgang Munchau, eponymous co-recipient of the inaugural Wolf Munch Rock Award for analytical potency in op-ed writing, has devoted sustained attention in recent weeks to the likely fallout from the subprime crisis. Like his colleagues Rachman and Wolf, Munchau wears no ideology on his sleeve: his focus has been on teasing out how one credit market segment is likely to affect others, and how central bankers and fiscal policymakers might best alleviate the crisis. Several themes have emerged so far from his analysis:
- The crisis is likely to be neither short nor mild; credit sqeezes and default waves are likely to wash over several other market segments, including credit cards, credit default swaps, and loans financing leveraged buyouts.
- Central banks are a bit clueless and a bit powerless. Interest rate manipulation will not suffice to restore credit markets to health; the right kind of fiscal stimulus will also be needed.
- Global 'decoupling' from U.S. economic conditions is nascent -- too weak at present for, say, Asian economies not to suffer from a U.S. downtown, but real enough that that recession here need not mean recession there. Munchau's forecast: "this year marks the start of an asymmetric global economic downturn that is likely to persist for some time and will probably be quite unpleasant, but which will be well short of catastrophic."
Methodically, without any sturm und drang, Munchau has provided lay readers with a serial tutorial on the way credit markets affect each other and the businesses and households that depend on credit in various ways. You cannot read him and maintain much hope that the subprime crisis will blow over any time soon.