This article first appeared in the St. Louis Beacon: November 21, 2008 - There are no heroes to be found in today's economic crisis, and it won't be over any time soon, says St. Louis economist Murray Weidenbaum.
"I've been saying for some time that this is going to be a long, deep recession; we're not going to come quickly out of it. I hope that some time next year we'll be hitting bottom and the economy will start turning up -- but not dramatically,'' Weidenbaum told the Beacon on Thursday.
Weidenbaum, a member of the Washington University economics faculty since 1964, served as chairman of President Ronald Reagan's Council of Economic Advisers in the early 1980s. He is honorary chairman of the Weidenbaum Center on the Economy, Government and Public Policy at Washington University.
"If you're not confused, you don't know what's going on,'' Weidenbaum said about the current financial instability. "I'm serious. This is an unprecedented and totally confusing situation. Certainly since the end of World War II, we haven't had a situation like this where almost every part of the financial system takes a turn showing a fundamental disarray. I'll put it this way: There are no heroes. Almost everyone involved deliberately or just by ignorance did something stupid or venal."
Weidenbaum believes that economic recovery will require taking the long view, beginning with a major government stimulus package to produce jobs though construction projects, such as bridges and highways.
"Some of them can start more quickly because the designs have already been made, but they haven't gone ahead because of budget limitations. The stimulus package would provide the budget," Weidenbaum said.
Weidenbaum's policymaking experience dates to the 1950s when he served as an economist with the U.S. Bureau of the Budget. He has written eight policy books and has just published a new work, "The Competition of Ideas: The World of the Washington Think Tanks" (Transaction Publishers, 2008).
"I spent most of my career as a conservative Republican, and I still think I am," he said. "But that doesn't mean you never change your mind if circumstances change. In this kind of circumstance, the government has to take the initiative and be the big spender. And then hopefully it will start things going again."
Weidenbaum says efforts to balance the budget will have to wait until the economy recovers.
"We need to spend more now," Weidenbaum said. "But let's remember when we get out of this, 'Save for a rainy day' isn't poetry, it's good common sense."
Here is more of the Beacon's interview with Weidenbaum, including a lengthy, but simple-to-understand explanation of how the crisis started:
What are your thoughts on U.S. Treasury Secretary Henry Paulson's announcement last week that the $700 billion financial rescue fund would not be used to purchase bad mortgage assets, although that was the plan he originally took to Congress?
Weidenbaum: Well, the kind of thing I'd say is that he didn't know much more than the rest of us.
That wouldn't seem to inspire public confidence.
Weidenbaum: Of course not, and that's why the stock market and the bond markets are going south so rapidly. How can you have confidence? And it doesn't inspire confidence that just about everyone he's brought in used to work for him. I'm not saying that the folks at Goldman Sachs were dumb or venal. But there is something basic: If just about everyone used to work for this man, he doesn't have anyone who is going to stand up and argue with him.
From your perspective, how did the crisis get to this point?
Weidenbaum: We'll start with the housing situation because that's where this mess started.
First of all, lots of people signed up for homes that they surely couldn't afford. Some of them didn't even fill out the forms, and they were told, "Oh, don't worry about it.'' Well, over the years, if a company wanted to get a loan from the bank, it had to provide all sorts of detailed information so they could judge whether there was a reasonable chance of the bank, or whoever was lending the money, getting its money back. That didn't occur in so many cases because everyone assumed -- like a hot potato - that they'd pass it on.
The person buying the house, assumed, well, housing prices are going up so rapidly I'll have sold the house before my interest rates go up. The people who arranged for the mortgage? A lot of them pushed people into high-interest sub-marginal loans because they had a bigger commission. Why did they get a bigger commission? Because the people financing the loans knew they would be passing it on to somebody else so they didn't worry that a higher interest was charged because it was a riskier loan.
The people who took on the mortgages, packaged them, sliced and diced them into esoteric securities that not many people understood, including the rating agencies that put AA or AAA ratings on the securities. And then people around the world, not just around the country, bought these things.
Meanwhile, the Federal Reserve was pumping money into the economy because at one point, they worried about deflation. Maybe now we can worry about deflation but back then, there was no deflation. That was just a theoretical concern. Money was very easy, so, therefore, the availability of these mortgage loans was great. And a lot of brilliant people who don't know much economic history said, "Don't worry about the mortgages because, after all, housing prices may come down for a while in some regions, but, nationally, housing prices never go down, they always go up.''
Of course, anyone who lived through the Depression will tell you otherwise. But most of these people were born way after the Depression of the 1930s. Wherever I turn, I see there are only villains -- no heroes.
There has been much discussion about the need for more regulations of the banking industry.
Weidenbaum: First of all, there wasn't a lot of deregulation. That's one of the myths. The airlines were deregulated. The railroads were deregulated by Jimmy Carter, as it turns out. But the banks weren't deregulated.
Now, I'm not saying that the regulators were the most brilliant people around, but there was no massive deregulation. There was one fairly limited deregulation bill that was signed by Bill Clinton, but nothing since. So, that amount of deregulation I don't think was a serious culprit. If that bill had been vetoed, it wouldn't have made that much difference. It was the people who were carrying out these activities -- and the Fed keeping money too easy, interest rates too low, too long. That wasn't deregulation. It was just, in retrospect, some dumb decision-making.
What can be done now?
Weidenbaum: There aren't any good answers because so many billions and billions of dollars have been lost because people bought these securities and they're worth a small fraction of what they paid for them.
There isn't a simple direct solution. There are a few things that would help, certainly. Almost every administration extends unemployment compensation during a serious recession because it's not that people are too lazy to look for jobs, jobs are disappearing.
Are there public works projects -- I don't mean boondoggles -- I mean repairing bridges and tunnels that clearly need to be done and that would create employment and put money back into the economy? Yes.
There are production lines for the military equipment that has been chewed up in Afghanistan and Iraq. In theory, we're supposed to replace the depleted stocks of aircraft missiles, trucks, tanks, etc. This would be a good time to do it.
But we have to accept the fact that the federal government will run at a large deficit. It will anyway.
What are your thoughts on President-elect Barack Obama telling "60 Minutes" that, in the short term, the nation shouldn't worry about running a large deficit?
Weidenbaum: That is an understatement. My guess is this year we will be running the largest deficit ever, close to $1 trillion. But, frankly, if you try to reduce the deficit in this situation, you'll just weaken the economy and wind up with a bigger deficit.
So, this isn't the time to be talking about balancing the national budget?
Weidenbaum: That's right. But we shouldn't forget when the economy recovers, and things are humming along, that that's the time to cut government spending and reduce the deficit. And, of course, people like to change the subject at that point. But that's not today's problem.
What are your thoughts on bailing out the U.S. automakers?
Weidenbaum: Why should the average taxpayer who has a lower salary than the average GM worker -- and far lower fringe benefits -- bail them out?
This is because the companies -- and I include the management and the unions equally -- don't want to make the tough decisions. It is a very high-cost industry. But if the Japanese firms can operate much more efficiently than GM or Ford or Chrysler, well, GM, Ford and Chrysler have to fix that situation.
What about the bailouts of the financial institutions? Why aid AIG and Bear Stearns and not Lehman Brothers?
Weidenbaum: I don't know why they didn't bail out Lehman Brothers the way they handled Bear Stearns. The Bear Stearns shareholders lost, the management lost, and actually the firm was incorporated into another firm. But it didn't just go bust the way Lehman Brothers did.
I think it started snowballing after Lehman Brothers went bankrupt. That's why they then bailed out AIG -- because they realized a few of these strategically located financial firms had financial ties with so many parts of the economy that if they go broke, they pull so many people down with then.
If you had the opportunity to offer advice to Obama, what would it be?
Weidenbaum: You've got to bring in people you have confidence in and who can put together a comprehensive program. This is what worries me about the Treasury -- that Paulson's only brought in the people who used to work for him and who don't know how to argue with him.
I don't think much is going to be done until Obama takes over. Not that I expect that much from him, but Bush is a lame duck -- a discredited lame duck and the Fed has brought interest rates so low they can't do a lot more.
Congress has to pass another big stimulus bill that will directly create employment and not one that will put money into the pockets of consumers. That didn't do much good.
Do you think the American public would support that?
Weidenbaum: Not at this point. That's for the new president. I don't want to dwell on Reagan, but he's the guy I directly worked for. You know his famous tax cuts. But the polls at the time showed that people preferred cutting the deficit to cutting taxes. Nevertheless, when he pushed for big tax cuts, the reaction was, well, let's give him a chance. We've just elected a new president and that's what he wants to do. Let's see if it works. Let's give him a chance. That's the right attitude to take with Obama -- who I did not vote for.
In terms of the global economy, what does this crisis mean for the stature of the United States?
Weidenbaum: It hurts. When a town in Norway goes bankrupt because they bought U.S. securities that were labeled AAA and they defaulted and now the town is bankrupt, they'll never buy a security from the United States again. Your sympathy has to go out to them and not to the bankers here.