By Christopher Werth 

This week markets around the world suffered their biggest drop since 9/11, as fears of a U.S. recession brought turmoil to global share prices. The U.S. Federal Reserve’s interest rate cut of three-quarters of a percentage point buoyed markets in Asia, but did little for those in Europe, where fears of what’s to come won the day. Newsweek’s Christopher Werth spoke with Roger Bootle, Managing Director of Capital Economics, a research consultancy in London. Excerpts:

What, currently, is the outlook for the markets?
I suspect that they’re probably going to fall a fair bit further over the next few months.

What projections can you make on how bad things might get?
I think that recession will be only narrowly avoided on both sides of the Atlantic, if at all. Probably still, the most likely thing is that the US doesn’t fall into recession, but the chances of it are growing by the week.

What should people do in this kind of market?
Some people have been listening to the rocket scientists – a.k.a. the snake oil merchants – and a lot of people got into trouble. All you do if the market’s falling is don’t hold stock. But, that’s not much help now because the market’s already fallen, potentially.

What does this say about the notion that economies are ‘de-coupled’ from one another—that a decline in the US doesn’t necessarily effect India or China?
I never really properly believed that, because although India and China have grown a lot bigger, they’re still pretty small in relation to the United States. And, the influence of the U.S. on the world economy is still enormous. If anything markets should have become more coupled than they’ve ever been because of the degree of international integration that’s taken place.

What effect will interest rate cuts have?
They’ll help a bit. I don’t think they’re going to cure the fundamental problem, which is that asset prices in a number of countries have gone too high. In particular, property prices on both sides of the Atlantic are going to have to come down, and there will be significant losses for banks because of all that, with the result that credit will not be as freely available as it used to be in the past. If you can lower interest rates to ease the pain, then at the margin they’ll help a bit. But, they won’t cure that fundamental problem. If asset prices are at the wrong level, and banks are bust, it’s actually not going to do you much good.

What do you make of the emergency meeting and the ¾ cut by U.S. Federal Reserve?
It depends if the Fed knows something that we don’t know. It smells of panic. There are plenty of people in the market who see it that way.

What other measures should governments be taking?
The most important adjustment which needs to happen in the world economy, and this of course isn’t under the control of either American, or Britain, or the Euro Zone, is to encourage the super saving countries, principally China, the Middle East, and Russia, to start saving a lot less and spending a lot more.

Is this all part of a necessary, or even inevitable, market correction?
It depends where you start from really. I suppose given the way things have panned out, the answer is yes.