How economy looks to the man who wrote the book
Nobel laureate Paul Samuelson blames crisis partly on 'fiendish' financial engineering on Wall Street.
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"I'm grateful for half a percent," says Samuelson, hinting that lower interest rates would be useful even if they result in somewhat more inflation in perhaps five years. The extra money in the system, economic theory goes, will eventually be spent by Americans and revive economic growth. A modest increase in inflation, he says, "doesn't mean the end of the world."Skip to next paragraph
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Samuelson recalls when John Williams, a professor of finance at Harvard in the 1930s who was also on the board of the Federal Reserve Bank of New York, said in class that he wouldn't lend money to anyone, apparently because he didn't see potential borrowers as trustworthy for repayment.
"We are having that sort of problem today," Samuelson says.
Another economist, Michael Cosgrove of the University of Dallas in Irving, Texas, calls for the Fed to add "permanent liquidity into the system" through its control of monetary policy. He sees the $700 billion rescue package recently passed by Congress as a "defensive action," with the Fed buying the distressed assets of financial institutions, but presumably selling these back into the market at a later stage. The 3 percent growth in bank reserves in the past year is "pretty puny," he says.
"It is going to take quite a long time to build up trust" in the financial system, Professor Cosgrove holds.
Paulson is "experienced, savvy"
Samuelson is not a fan of the Bush administration and its earlier drive to deregulate the financial industry. "The market system is the best system in the world," he says. "But without regulation it is a very bad system ... with tremendous built-in fragility."
He criticizes some Bush appointments for their deregulation program, but does describe Treasury Secretary Henry Paulson as "a pretty experienced, savvy person" and Fed Chairman Ben Bernanke as "pretty cool."
The veteran economist also criticizes corporate chiefs for their extravagant earnings and directors in the corporate boards for approving the high pay. Directors are chosen by the CEOs because they are known not to be "troublemakers," Samuelson says. And he disapproves of the "plutocratic democracy" in the US where well-to-do donors to political campaigns "buy in advance privileges" that may damage the public good.
Samuelson doesn't expect the economy to come roaring back this year or even next, despite the recovery measures taken so far.
That is a common prognostication.
Seeing this fear, both presidential candidates have proposed measures to deal with the problem of housing foreclosures.
Sen. John McCain last Tuesday apparently embraced a proposal by Harvard University economist Martin Feldstein that the federal government should offer any homeowner with a mortgage an opportunity to replace 20 percent of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000.