Nailing the Problem of a U.S. Recession


A cursory tour of the pubs in Davos will reveal a popular Swiss and Austrian bar game called "Nageln" or "nailed."

A huge tree stump rests in the corner of the bar and the object is for a player to hit three nails into the stump with three consecutive blows of a hammer. Any miscues and the player takes a swig (or more) of beer.

It's a useful metaphor for this year's World Economic Forum -- minus the beer. Three issues keep being raised in Davos: a potential US recession and its global impact, the tightening of credit and the selloff in global markets. And for countries to really nail these problems will take precise action, and likely result in a few missteps.

The WEF shuttle vans were packed this morning as many shunned the short walk with temperatures well below freezing. And even the small talk was predictions on how bad the financial crisis would get.

On my ride in, a representative from the World Health Organization, who specializes in tuberculosis, bemoaned the fact that it's all markets all the time.

Former Treasury Secretary and current Cerberus Capital Management Chairman John Snow and Morgan Stanley Asia Chairman Stephen Roach shared their thoughts with CNBC Wednesday morning.

Both agreed on one thing: that the U.S. recession would have a huge impact on the rest of the world. Roach called decoupling "one of those new paradigms you always hear at the top of a market bubble."

But Snow is optimistic about the economy weathering a slowdown, arguing that a combination of a bold Fed cut, tax cuts on those who create jobs in the U.S. and possibly other government stimulus actions will keep the economy out of recession.

Roach contends a recession is inevitable and that the Fed could already be on its way to creating the next bubble, just as Alan Greenspan's cheap money era pushed home prices to unprecedented level.

"If the U.S. economy continues to move into recession, the Fed will want to take out insurance that the recession does not get out of control," Roach told

"When you have recessions that are caused by the bursting of asset there's always as risk of a fairly significant period of debt deflation, which could make it very, very difficult for the normal resilience of economies such as the U.S. to work their way out," Roach said. "I honestly think that the markets had the Fed's action wrong. It was not aimed prevent recession, it was aimed at ensuring recovery."


"The record of the Federal Reserve is not great in the last eight years," Roach added. ""We've gone from equity bubble, to property bubble, to credit bubble to subprime bubble. And if we inject more liquidity in the system there's always a risk of another bubble."

But Snow had another reason to be positive, as he told former U.N. Secretary General Boutros Boutros-Ghali in the CNBC green room: "Nobody asks me about the dollar any more!"