Critical Mass

How Many Economists Does it Take……?

By Jane Ciabattari

A huge crowd stormed the doors early at the Metropolitan Museum of Art on Thursday evening, eager to hear the megastar lineup (constellated by PEN World Voices and the New York Review of Books) talk about the global financial meltdown, the future, where we stand. Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, and Robin Wells.  (Listen for yourself; podcast here.)

As the economic crisis swirled in the background, some of the best economic thinkers/authors in the land sat together to answer the question of the day posed by moderator Jeff Madrick of The Cooper Union and The New School. What is the state of the economy? Do we need to change policy? And what is the future? And what will we learn on Monday when the “stress tests” results reveal what is on the bank balance sheets? Can anyone identify any of the “green shoots” Fed Chair Ben Bernanke has talked about?

The consensus among the gathered panelists: Yes, we are in a terrible mess, not sure when it will end. Various solutions were bandied about. No one agreed on what to do. As usual, Ferguson and Krugman were at odds.

Sen. Bill Bradley, a onetime presidential candidate and author of The New American Story, said he was there to speak for the common man: “This could take 15 to 20 years to clean up…. The government could buy Citicorp—its current market cap is about $17 billion—for a fraction of what we’ve already put in and sell good assets back to the public.A rights offering for any American who wants to invest in this good bank.”

Ferguson, an economic historian affiliated with multiple universities (Harvard University, Harvard Business School, Jesus College, Oxford, Stanford’s Hoover Institution), author of the recently published The Ascent of Money: A Financial History of the World. “This is the end of the age of leverage which began in the late 1970s…. When economics fails as a discipline, we retreat into psychology. This crisis began in June 2007; in August 2007 major financial institutions were on the brink of insolvency.” The reaction? Denial. Then, in September 2008, breakdown. “Now we are in the therapy phase,” he said. He defined the contradictory options as Dr. Friedman (Milton) versus Dr. Keynes (John Maynard), and argued that the Keynes prescription, dating to 1936, is obsolete. His solution? In a nutshell, reduce debt.  “We are Argentina,” he said. When he questioned the future of the dollar as a trusted reserve currency, the audience gasped.

Paul Krugman, Nobel laureate in economics, Princeton professor, New York Times columnist:”One of the problems we have is the great forgetting.” He noted that the lessons of the 1930s still stand. As a result of the crisis, he said, “People realized they have too much debt, were not as wealthy as they thought, and began saving, not spending. And not investing. We have a global savings glut. Business can’t get access to capital. Consumer demand is not there. The government is playing the role business is not willing to pay. The scale of the crisis has overwhelmed the response.”

Any “green shoots?” “Things are getting worse more slowly,” Krugman said. “We could be left in our trap for many years.”

Turkish-born international macroeconomist Nouriel Roubini of New York University, aka Dr. Doom, laid out some options. Will it be a V-shaped short and shallow recession? (Too late for that one, as we’re already too far in.) A U- shaped 24-month recession, or, ghastly thought, an L-shaped (as in lengthy and interminable) recession as Japan experienced during the “lost decade” of the 1990s? Or even a Depression.

George Soros, financier, philanthropist, and perhaps the most relaxed person in the room (he made another bundle over the past year): “The financial system collapsed after the bankruptcy of Lehman Brothers September 15. The system collapsed of its own weight. The paradigm that the markets are self correcting has been proven false. So we are dealing with the collapse of a worldview. Events have outpaced people’s ability to understand what is happening. That is the situation President Obama inherited.”

Soros’s solution: “1. Arrest and reverse the collapse. 2. Reconstruct the system. “ He points to a hopeful sign that might emerge when the results of the bank stress tests come out over the next 10 days. “Policy has been lagging behind. If the stress tests gives a realistic picture of the banks, “good” banks will be able to raise money, and that will narrow the problem.”

“Markets need to be regulated,” he added. (He makes that argument, among others, in The Crash of 2008 and What it Means: The New Paradigm for Financial Markets Soros ).

Soros got one of the evening’s few laughs when he mentioned his approach when the market is in a period of ”irrational exuberance.” “When I see a bubble forming, I jump on it. It’s rational, because that’s how I make money.”

Last up was Princeton researcher and Krugman coauthor Robin Wells: “We have deep structural problems to solve to avoid a similar situation 10 years from now. We have been living beyond our means. We can’t keep doing this. We’re going to have to grow up.”

In follow-up questions, Krugman noted that in recent years 41 percent of the profits were being made by the financial sector. “We need to shrink this back down,” he said. “Deregulation boarded the financial sector, which created the monster that ate us. And we need to form a strong social safety net. Human suffering is much greater here in the U.S. than in Europe. Europeans don’t lose their health care when they lost their jobs. When Americans lose their jobs they fall into the abyss. That does not happen in civilized countries.”

A scrappy Ferguson swiped at Krugman:  “I feel depressed. We’re now contemplating a massive expansion of the state. We’re going to regulate the markets. Print money in a limitless way and then raise taxes.” He used the term “soviet,” and the audience booed.(Krugman swiped back on his blog today.)

The last word went to Bradley: “I agree with Paul about the need for a social safety net. Let’s look at the mistakes policy makers made in the past 10 years. It is not news that people are greedy. It’s the job of government to moderate or mediate.

Bradley identified three mistakes: 

  *1999.Repeal of the Glass-Steagall Act of 1933, which banned commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage). The act also established the Federal Deposit Insurance Corporation (FDIC), insuring bank deposits, and strengthened the Federal Reserve’s control over credit.
  *1999. Alan Greenspan, then head of the Fed, made an explicit decision not to regulate derivatives.
  *2004. The SEC allowed banks to go from 10 to 1 leverage (cash on hand versus debt) to 30 to 1 leverage, meaning for every $30 of debt, the banks were required to have $1 of equity.

Bradley’s advice: “Undo these three mistakes. The Federal Reserve is supposed to remove the punch from the party when it gets out of control. This did not happen during the Greenspan years.” Applause. Curtain.

So what did we learn? Economists can’t agree on what to do next. They don’t even agree on the past, not to mention the facts.

Footnote: Current issue of New York Review of Books on the disaster: Archives include work by/about Ferguson, Krugman, Soros, Wells (with Krugman).