By Kim Jae-kyoung
Staff Reporter
A noted global equity and real estate expert warned that the U.S. economy could experience a financial crisis akin to the one that swept through most Asian countries in the late 1990s, citing its much leveraged financial system.
In his latest research note, Andy Xie, an independent economist and former Morgan Stanley Asia chief economist, said that the one-year long crisis has taken place in slow motion, because there hasn't been de-leveraging ― a firm's attempt to reduce its financial leverage, the amount of debt used to finance a firm's assets.
He pointed out that if de-leveraging really happens in the U.S., re-pricing of risk assets will follow and this would have a huge effect on the economy.
``Cheap credit has fueled U.S. consumption. Credit has been cheap because the Fed has been easy and Wall Street has created hard-to-understand products to under-price the risk,'' he said.
``The re-pricing means a big reduction in credit to U.S households. In this case, the U.S. economy could go through what happened in Asia a decade ago ― 4 to 5 percent contraction in gross domestic product (GDP),'' he added.
Xie, who received a Ph.D. from MIT, explained that the U.S. financial system as a whole may have negative equity, noting that if its leverage assets depreciate 10 percent, it doesn't have equity anymore.
``The U.S. financial system is too leveraged to sustain a major reduction in asset prices. It may mean the whole financial system is bankrupt,'' he said.
According to Xie, the U.S. financial sector's leverage was 137 percent of GDP in 2007 compared to 100 percent five years ago and 70 percent 10 years ago.
If leverage can go back to between 100 percent and 70 percent, the amount of de-leveraging would be over $6 trillion, 10 times Lehman's unwinding, which could mean a major reduction in asset prices, he said.
Xie stressed that the only solution for the U.S. is to print money to cover up liquidity problems at financial institutions and let them sort out their losses over time
``The only remaining weapon is the dollar. The U.S. can print dollars and share the burden with the world,'' he said, adding that only when central banks dump treasuries, would the U.S change its policy.