Paul Krugman, professor of economics at the Massachusetts Institute of Technology, yesterday cast grave doubts about the United States economy's ability to maintain its present growth rate while delivering an upbeat assessment of Asia's capacity to recover. The US economy was overheated and Wall Street was 'dreaming' if it believed that 3.5 per cent growth rates could be sustained, he said during an interview while attending the Credit Suisse First Boston (CSFB) Asian Investment Conference. 'I think for the next few years we are going to be a 2 per cent economy and that is not what Wall Street is expecting. Wall Street has got dreams of 3.5 per cent forever built into stock prices and that is what scares me,' he said. Wall Street's 'unrealistic' expectations were shared by many senior economists who were committed to a belief in the 'new economy' and were determined to only look at the 'sunny side'. 'Economists keep on coming up with reasons why an overheated economy is not an overheated economy. They are in denial,' Prof Krugman said. 'I'm very nervous about asset prices in the US which seem to be based on a not-thorough appreciation of what the economy is capable of doing.' However, the professor drew a sharp contrast between the outlook for the US and Asia, repeating his view that the worst of the regional crisis was over, although the process of regeneration would be slow and patchy. 'If I was to look at the world two years from now I could imagine the Dow off 1,500 points, a growth rate of 2 per cent, all the hoop-la gone about the US economy and the US looking rather chastened,' he said. 'The Asian economy is not out of the woods. I could imagine one year of no growth, one year of slow growth and signs of a recovery beginning at the start of the third. 'But by then, the shoe will be on the other foot. This great American bullishness will have evaporated and Asia will have started to feel a bit better about itself.' He singled out South Korea and Thailand as countries that were showing signs of fastest recovery and forecast that double-digit growth rates could be achieved in certain countries within three years. The essential ingredient for this to be achieved was a resurgence in capital inflows. This would assist efforts to push down domestic interest rates which were a block to recovery. Prof Krugman lined up with most economists by saying cronyism was one of the root causes for the crisis, but doubted this would disappear rapidly as a feature in Asian business. 'These places are not going to turn into Switzerland tomorrow,' he said. Certain levels of cronyism and nepotism were tolerable, he said. However, when combined with volatile international capital markets, they could have massively adverse repercussions - as the recent crisis had shown. 'If we continue to get industrial empires based on access to the president, that's a bad thing but it won't necessarily lead to crisis unless it leads to crazy banking. I think the Asian countries have figured this out.' He repeated his belief that the world needed an institution to act as a banker of last resort with sufficient resources to enter crisis situations, although political and financial considerations would hinder its creation in the short term. Prof Krugman has been relatively mild in his criticism of the IMF's conduct during the crisis. 'The IMF does not have the resources, the political insulation or the authority to do what the Bank of Japan or the Federal Reserve does domestically and we are therefore doing international finance without a safety net. It lacks the tools to deal with international financial panics of broad scale,' he said. Although the mainland would continue to suffer from the fallout of the regional crisis, it was unlikely to devalue its currency. He said such a move at this time could possibly have a 'catastrophic' impact on the region. 'They [the Chinese] are in a difficult phase. They are not having a crisis but they have an economy which is in cyclical difficulties and they don't have any terribly good alternatives available partly because of the crisis in Asia,' Prof Krugman said. Central to the mainland's problems was weakness in the banking system, with cronyism a feature that it shared with Asian countries. 'They have a terrific structural problem. They have allowed capitalism to grow between the cracks and they have reached the limits of that. They have a banking system that is probably worse than in many of the Asian countries,' he said. 'Their saving grace is the inconvertibility of the currency and the absence of foreign debt.'