Aso, Brown Efforts to Save Themselves May Help Bush

By Rich Miller and Simon Kennedy

Sept. 29 (Bloomberg) -- Embattled political leaders in Tokyo and London may end up coming to the aid of President George W. Bush in containing the economic fallout from the credit crisis as political self-preservation trumps nationalism.

Confronting a recession, Japan's new prime minister, Taro Aso, is likely to promise tax cuts and higher spending in a bid to win a parliamentary election as early as next month. British Prime Minister Gordon Brown, who faces unrest in his party over its and his sagging popularity, may also opt for budget-busting measures to turn around the weakest U.K. economy since the early 1990s.

That would be welcome news for Bush and Federal Reserve Chairman Ben S. Bernanke because the U.S. has become so dependent on exports to generate growth -- gross domestic product, which expanded at a 2.8 percent annual rate in the second quarter, would have contracted were it not for trade -- that anything foreign governments do to stimulate their own economies is likely to help.

``We're heading into a global recession,'' says Simon Johnson, former chief economist at the International Monetary Fund and now a senior fellow at the Peterson Institute for International Economics in Washington, who adds that ``there's room'' for governments to do more.

Pull All Strings

Central bankers, meanwhile, are under pressure to ease credit, and investors are betting they'll do so within months. Traders see the Bank of England cutting its benchmark rate, currently 5 percent, in October, according to a financial-market index compiled by Credit Suisse Group. Economists surveyed by Bloomberg News expect the European Central Bank to do likewise early next year after keeping its rate unchanged at 4.25 percent at a meeting this week.

``Policy makers may soon be forced to pull all available strings, including rate cuts by all the major central banks,'' says Joachim Fels, co-chief economist at Morgan Stanley in London. The ECB, Bank of Japan and other central banks have already united with Bernanke to pump dollars into money markets.

Leaders in China and Russia, meanwhile, are stepping back from claims that the credit crisis is a U.S. problem and are moving to aid their countries' economies.

`I Told You So'

When the turbulence began more than a year ago, other countries let the U.S. take the lead in mitigating the impact. While policy makers in Washington cut interest rates at the fastest pace in two decades and adopted a $168 billion economic- stimulus package, their counterparts in other capitals held back.

Talk of decoupling -- the seeming ability of the rest of the world to forge ahead while the U.S. faltered -- was fashionable. Some commentary still has an ``I told you so'' tone, suggesting that America is getting its comeuppance after years of lecturing the rest of the world on the benefits of unfettered capitalism.

German Chancellor Angela Merkel chided the U.S. and the U.K. for not listening when she called last year for stronger financial regulations. ``Germany has always pointed out how necessary they are,'' she said in a Sept. 22 speech in Berlin.

But any schadenfreude is accompanied by a realization that other countries aren't immune to America's woes. ``Like everywhere in the world, the French fear for their savings, their jobs, their purchasing power,'' President Nicolas Sarkozy said Sept. 25 in Toulon.

Bad Debts

Johnson says he expects global growth to fall ``considerably'' below the 3 percent rate the IMF deems equivalent to a world recession. The international economy grew 4.9 percent last year.

Treasury Secretary Henry Paulson has called on other countries to follow the U.S. by setting up programs similar to his $700 billion plan to buy bad debts from banks. While none have done so, Japan and the U.K., among others, are shifting their policies by looking for ways to boost growth.

Japanese officials, who earlier this year were advising the U.S. on the lessons they learned bailing out their banks in the 1990s, now are focused on expansion. The world's second-largest economy contracted at a 3.3 percent rate in the second quarter.

Aso, 68, last week named Shoichi Nakagawa, an advocate of increased government spending, as finance minister, a sign the new prime minister wants to move quickly to turn the economy around. Aso's Liberal Democratic Party has historically used spending on bridges and other infrastructure to build support.

`Boost the Economy'

LDP officials predict Aso will call an early election to capitalize on any honeymoon period his government enjoys, rather than wait until lawmakers' terms expire next September. The LDP, which has ruled Japan for all but 11 months of the past half- century, trails the opposition Democratic Party of Japan in some polls.

Japan is going to be ``spending money to boost the economy, ending the strong commitment to balance the budget by 2011,'' says Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo.

The U.K.'s Brown, 57, has his own political and economic problems seven months after his government nationalized mortgage lender Northern Rock Plc. With polls showing his Labour Party trailing the opposition Conservatives by 10 percentage points and more, Brown is already under pressure from restive party members to step down.

Meanwhile, a housing slump is pushing the British economy toward its first recession since 1991. Chancellor of the Exchequer Alistair Darling said last week he will put off action to curb the government's mounting budget deficit -- 10.4 billion pounds ($19.2 billion) in August, the largest for that month since records began in 1993 -- arguing that it isn't the ``right time to be taking money out of the economy.''

Radical Steps

Brown's government today seized Bradford & Bingley Plc, the country's largest lender to landlords, after it struggled to find funding for its lending.

Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. in London, says the government should follow the U.S. in taking radical steps to rescue the economy, perhaps by taking over the mortgage-lending activities of troubled banks.

``We need to consider some out-of-the-box things,'' O'Neill says. Leaders in emerging markets, until now the dynamos of the global economy, also are under pressure to offset the spreading economic troubles.

``Asia is not going to come out of this global crisis and slowdown unscathed,'' says Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. ``People are on the edge, and there's political pressure to ease the burden.''

Slowing Growth

Chinese officials, who earlier this year were telling the U.S. to put its house in order, are now moving to counter a slowdown in their own economy.

China Investment Corp., the government's $200 billion sovereign-wealth fund, bought shares in leading banks to shore up a stock market that is down almost 60 percent in 2008, according to the official Xinhua News Agency. China's leaders are also working on a plan for as much as 400 billion yuan ($58 billion) of spending and tax cuts following four straight quarters of slowing economic growth.

Russian policy makers have little time for self- congratulation as they struggle to contain a crisis of confidence in the country's economy and markets.

President Dmitry Medvedev this month pledged 500 billion rubles ($19.6 billion) to ensure ``the stability of the stock market.'' This was part of more than $100 billion the government said could become available through loans, tax cuts and other measures. Russia's dollar-denominated RTS Index is the second- worst performer this quarter among 88 markets tracked by Bloomberg.

``You're not seeing a lot of the gloating about the U.S. problems that you heard before,'' says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``Instead, you're starting to see a lot of the countries starting to do some of the stuff that the U.S. has been doing.''

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net; Simon Kennedy in Paris at skennedy4@bloomberg.net