World's Top Economists Agree: The Global Recession Will Continue
NEW YORK -- "As you might have realized by now, we're in a difficult situation," said billionaire investor and philanthropist George Soros to a sold-out crowd at the Metropolitan Museum of Art on Thursday evening. Though Soros earned over $1 billion last year, eighteen months into a housing crisis and after over a year of decreasing GDP it's clear that the rest of the country is in dire need of economic salvation.
Soros was flanked by some of the best economic minds in the country, who gathered on stage at the Metropolitan Museum of Art to discuss solutions to the global economic crisis. The panelists unanimously agreed on two points: this is a global crisis, and we're not through with it yet.
The discussion was sponsored by The New York Review of Books and part of the PEN World Voices Festival of International Literature. Panelists included Harvard Professor of Economics Niall Ferguson, a senior research fellow at Oxford and the evening's only staunch Milton Friedman acolyte; Princeton Professor of Economics Paul Krugman, noted New York Times columnist and recipient of the 2008 Nobel Prize in Economics; Princeton Professor of Economics Robin Wells, Krugman's frequent writing partner; NYU Professor of Economics Nouriel Roubini, a former senior adviser to the White House Council of Economic Advisers and the U.S. Treasury Department under Clinton; and former New Jersey Senator Bill Bradley.
Krugman and Ferguson dominated the discussion. Ferguson made a case for conservative free market capitalism, while Krugman -- with support from the other panel members and the majority of the crowd -- advocated the Keynesian economics underlying Obama's stimulus bill.
Ferguson began by describing the economic crisis in psychological terms, pointing to the initial widespread denial of readily apparent problems in 2007. "I called it the great repression," he told the crowd. "Then last September we went into shock" after admitting that something was seriously wrong. Ferguson took issue with what he believed to be mutually exclusive remedies for the crisis, massive injections of liquidity and debt spending that requires "vast quantities of newly printed bonds," both of which are currently being pursued by the Obama administration.
In a clear shot at Keynes, Krugman and the other panelists, Ferguson criticized debt spending as a outdated remedy for the economy: "This prescription says 1936 on the bottle... and I fear we'll get the 1970s for fear of the 1930s." Ferguson also took issue with the risk of inflation posed by issuing government bonds to pay for expansive fiscal policy. "If you want the Soviet model, that's fine," he told a hostile crowd.
With a look of disdain, Krugman reminded Ferguson that the U.S. national debt was 100 percent of Gross Domestic Product (GDP) after World War II and the economy didn't suffer. It's a mere 60 percent of GDP today. "The only thing that would drive up interest rates is if people don't believe the U.S. can pay down its debt," said Krugman, who did not seem to believe that investors would stop trusting the U.S. Federal Reserve.
After the panel, an elderly fan suggested that Krugman should have given Ferguson an uppercut to the chin. "The danger is that [Ferguson] thinks he knows what he's talking about," Krugman told the man.
While some pundits use recent gains in the stock market as evidence of a recovery, Bradley took issue with such simplistic thinking, saying, "Citicorp drops from sixty to one [dollar] and then goes back to three. I don't think that's a recovery."
Wells agreed, saying, "If the economy continued to drop at the rate it did in the first quarter, pretty soon we'd end up in the stone age." She reminded the audience that a slowed decline does not mean the end of the recession is around the corner.
Both Krugman and Wells waxed hopeful about "green shoots of spring," implying the possibility of new life cropping up on the bleak landscape of the global economy.
Krugman went on to describe the current dilemma in terms of a "global savings glut." While overspending from the 1970s onward created $13 trillion in household debt and helped catalyze the economic crisis, the problem today is that "people want to save, but there's nowhere to put their money," says Krugman. Due to the volatile financial sector, businesses lack access to credit and the few that can borrow refuse to invest. With an abundance of capital, Krugman argued that only government spending could create the required demand for investment in the current market.
"We understand this rather well, at least some of us do... I'm referring to the 38 Republicans who voted against the stimulus package because they thought we needed another round of Bush style tax cuts," Krugman said of the Senate Republicans with a glance toward Ferguson.
Krugman told the crowd that American policy makers have not fully applied the lessons learned from Japan's lost decade, when Japan spent thirteen years under the economic dead weight of insolvent banks before crawling out of a prolonged recession in 2003.
"We've actually turned Japanese despite of a determination, at least verbally, not to do so," said Krugman. "The point about the Japanese is not that they did too much, but that they failed to do enough. What Larry Summers was saying before was that you need to have a Powel doctrine; you have to attack this type of problem with overwhelming force. What we got instead was a Vietnam style escalation."
Apart from Ferguson, the panelists all stressed the importance of reestablishing strict financial regulations to prevent another financial collapse in the future.
As the only politician on the stage, Bradley took it upon himself to defined the importance of regulations in layman's terms. "It's not news that people are greedy," he said. "That's kind of human nature. It is that we made conscious decisions not to put limits on that natural human impulse."
He listed three fatal errors, beginning with the elimination of the Glass-Steagall Act in 1998, which paved the way for investment banks, banks and insurance companies to combine.
The second mistake was in 1999: the explicit decision by an administration and Congress not to regulate derivatives and credit default swaps, which in 2002 were worth $1 trillion and today are worth $33 trillion... 384 people in the London office of AIG doing the derivatives destroyed a company that had 116,000 employees in 120 countries. Why? Because there was no regulation at all.
Third, in 2004 the FCC allowed banks to go from ten-to-one leverage to thirty-to-one leverage. And guess what, once they were allowed to do it... they did it. If we're to look into the future, we might look at those three mistakes and remember that the Chairman of the Federal Reserve is supposed to remove the punch bowl from the party when things get out of control. That did not happen during the Greeenspan years--just the opposite.