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How economy looks to the man who wrote the book

Nobel laureate Paul Samuelson blames crisis partly on 'fiendish' financial engineering on Wall Street.

By David R. FrancisStaff writer of The Christian Science Monitor / October 14, 2008

How does the man who literally wrote the book on economics regard the current financial crisis and emerging global recession?

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Paul A. Samuelson's first answer is a bit understated.

"It's very serious," says the author of "Economics," the tome that served as a primer on the subject for several generations of college students. It is, he says, much more than the bursting of a big price bubble in the housing market, a phenomenon the US has experienced before with less ill effect.

Then the 1970 Nobel Prize winner unloads both barrels. It's so bad now, Dr. Samuelson says, in part because of "fiendish, Frankenstein financial engineering" by Wall Street that "obliterated" the transparency of the resulting derivative financial instruments now sinking banks and other institutions in the United States, Europe, and elsewhere.

He also criticizes federal regulators for allowing "unconscionable superleveraging" – that is, some financial firms borrowed as much as 30 and 40 times their own capital to make investments, creating a perilous financial position.

Samuelson, now a professor emeritus at the Massachusetts Institute of Technology in Cambridge, suggests that the US government "may have to do a lot of spending" to get the economy back on track. That approach, he adds, is "reminiscent" of what President Franklin Roosevelt did to help bring the nation out of the Great Depression of the 1930s, a time when Samuelson was studying economics at Harvard University.

College-educated Americans of a certain age probably know Samuelson as the economist whose textbook gave them a grounding in that subject. For decades after it was first published in 1948, "Economics" was the bestselling economics textbook in the US. It has been translated into 41 languages. In total, more than 4 million copies have been sold.

Of course, Samuelson is not the only economist to suggest the time is ripe for greater fiscal stimulus.

Dean Baker of the Center for Economic and Policy Research, a Washington think tank, calls for Washington to provide $300 billion to $400 billion to states and municipalities to spend on infrastructure, green retrofitting of buildings, and other useful projects that will provide new jobs or maintain old ones.

Baker suspects the labor market will remain weak through 2010 or 2011.

Lower interest rates useful

Samuelson also welcomes last Wednesday's coordinated half a percentage point cut in interest rates by six major central banks, including the Federal Reserve. Some economists had been calling for a full percentage point cut to what is known as the federal funds rate, from 2 percent to 1 percent.