US NEEDS TO DO MORE TO BRING WORLD ECONOMY TO NORMALCY, SAYS ECONOMIST

By Tengku Noor Shamsiah Tengku Abdullah

KUALA LUMPUR, Oct 11 (Bernama) -- As global equity markets tumble in recent
days on recessionary fears, economist and former central bank deputy governor
Dr Lin See-Yan feels the US authorities need to do more beyond the
recent US$700 billion bailout to bring the world economy to normalcy.

"What's done so far in the United States is necessary but not a sufficient
condition for normalcy. As of now, the financial system remains fragile so long
as asset values keep falling," he told Bernama here after presenting a paper at
the 32nd Asean Glass Conference.

In terms of financial, Lin said with much of losses yet to be realised
and the crisis still acute, it was clear that any credible systemic solution has
to be comprehensive in tackling the immediate fallout to regain market
confidence.

Such a solution, he added, also needed to be comprehensive in addressing
root causes to permit the broader global economy to function
efficiently.

Lin, who is a member of the Prime Minister's Economic Council, said this
approach would involve three elements -- liquidity provision, purchase of
distressed assets to remove reason for "runs", and capital injection.

"Black swans are out there. Putting out the fire is not enough. There has
certainly been a 1930s feel to events of the last six weeks," he said.

"These are exceptional times. Exceptional for what has happened to
financial markets, especially in the US. Exceptional for what has not happened,
at least not yet, to the broader global economy," Lin said.

According to him, the risk of a US recession has appeared more real than
ever before.

Lin said on the positive side, the US has shown greater resilience than
expected and was already on its 26th year run with only two short
recessions.

He said productivity gains have been consistent and the country's automatic
stabilisers were still sound.

Lin said over the longer term, structural repairs were needed as regulatory
failures required fixing and restructuring to guard against excessive
risk-taking.

He said the financial architecture, including the role of credit rating
agencies, has to be rebuilt.

According to Lin, the reforms also needed to be global in nature.

"A lasting solution to cover the international monetary system and future
role of the US dollar will involve vigilance, transparency and collaboration on
global scale," he said.

"For the US, fiscal cost will need drastic fiscal adjustments to underpin a
return to long-term stability," he added.

Lin said in the short run, amid the turmoil, panic and uncertainty, the
objectives of public policy should be centered on protecting the financial
system from institutional failures, and protecting the larger economy from
recession.

"Realistically, the likely scenario is a recession marked by a protracted
period of tight credit," he said.

Lin felt that the US stumbling into deflation because of the way the credit
crisis was playing out, with asset sales forcing down asset values and a slowing
economy exerting downward pressure on prices.

"However, the US still has many policy options," he said, adding that in
the end, the world's largest economy must expect macroeconomic weaknesses still
to come.