US NOT headed to a depression

August 6, 2008 NYTIMES.COM

Economists Plumb the Depths of the Downturn
By ABHA BHATTARAI
Even if the economy continues to deteriorate, economists generally agree that the United States is not heading for another Great Depression.

Not only are the conditions far less dire, eight economists said in interviews, but the government is playing a heightened role in trying to cushion the impact of the housing downturn, losses at financial institutions and rising unemployment.

“The government is larger now and it acts as an anchor,” said Richard Parker, senior fellow at the Shorenstein Center at Harvard. “During the Great Depression, the government had neither the means nor the capability to serve as a backstop.”

But the economists — who range from academics to policy researchers, liberals to conservatives — disagreed about just how bad this economic slowdown, led by the worst housing slump since the Depression, could be.

“I think we’ll see a miserable job market and, consequently, an eroded standard of living for the vast majority of Americans for several years,” said Lawrence Mishel, president of the Economic Policy Institute, a liberal research organization in Washington.

“This is indistinguishable from a recession for a working family,” Mr. Mishel said. “They’re losing jobs, and they’re getting a double bite as wage growth slows down and inflation kicks up. People are losing out on both ends.”

But others said that the economy would probably grow in the second half of this year, although at a low 1 to 3 percent pace.

“You read the headlines and you look around and you think the world is coming to an end,” said Charles W. Calomiris, a visiting scholar at the American Enterprise Institute, a conservative research group in Washington. “But I don’t think so. If you’re going to tell a worst-case scenario story at this point, it’s only going to be because the Fed loses control."

The Federal Reserve and the Treasury Department have already stepped in. The Fed has cut its benchmark federal funds rate to 2 percent, from 5.25 percent last August, though it left rates unchanged at its meeting on Tuesday.

In March, the government worked out a rescue plan for Bear Stearns when it became clear the investment bank was on the brink of collapse. And last month, Congress approved legislation that includes money for homeowners facing foreclosure and a possible bailout of the mortgage giants Fannie Mae and Freddie Mac.

Most of the economists who were interviewed blamed Alan Greenspan, the chairman of the Federal Reserve from 1987 to 2006, for his unwillingness to clamp down on either the technology stock bubble or the run-up in housing prices.

“The Fed isn’t the whole story, but it’s a big part of it,” said Gerald P. O’Driscoll Jr., who was vice president of the Federal Reserve Bank of Dallas from 1982 to 1994 and is now a senior fellow at the Cato Institute, a libertarian research organization in Washington. “It allowed these absolutely insane bubbles to happen. The lesson is, you can’t let these bubbles continue unabated with no policy making.”

But the economists said others were to blame, too: investors, banks and rating agencies, as well as the current chairman of the Federal Reserve, Ben S. Bernanke, and the Clinton and Bush administrations.

“They thought it was just a great thing that the stock market kept going higher and higher,” said Dean Baker, co-director at the Center for Economic and Policy Research, a liberal research group in Washington. “Then, of course, Wall Street just ran wild. It was some mix of irresponsibility and downright greed. They’re all sort of on the hook, but Greenspan sits front and center.”

The economy’s woes might have been preventable, the economists all agreed, if the actors involved had made more realistic assumptions about the future. And about the laws of gravity.

“People are way too willing to extrapolate from history,” said Jan Hatzius, chief domestic economist at Goldman Sachs. “If it’s 2005, you can’t look at a 40-year run of data and say, ‘It must be a law of nature that housing prices never fall.’ ”

The fact that average wages have not kept up with inflation has compounded the economy’s problems. Unemployment has also been creeping higher. Still, joblessness remains at 5.7 percent, while in 1933, one-quarter of the American work force was unemployed. In addition, the economy lost one-third of its value from 1929 to 1933.

Peter Cappelli, a management professor at the Wharton School at the University of Pennsylvania, compared the current battered economy to a boxer.

“The punches haven’t stopped long enough for him to catch his breath,” he said. “If the punches would stop, even for a second, the economy could catch its breath and pick itself up.”

The conservative economists said they thought market forces would play a dominant role in turning around the economy.

“This economy will get back on its feet, no thanks to Washington,” said J. D. Foster, senior fellow at the Heritage Foundation, a conservative research group in Washington. “There’s not much that politics can do at this point for the markets.”

Mr. Calomiris of the American Enterprise Institute said: “We do need some regulation — smarter regulation — to prevent the abuse of the safety net. But first we need to fix our broken regulations.”

But the liberal economists said what was needed was a combination of government regulations and policies, international negotiations, lower commodity prices and stabilization in the financial sector, including Fannie Mae and Freddie Mac.

All the economists agreed that regulators should have been looking more closely at Fannie and Freddie.

“Everybody turned a blind eye,” Mr. O’Driscoll of the Cato Institute said. “The Fed deliberately and consciously refused to regulate the mortgage industry like it was supposed to have done. I’m not a big fan of government regulation, but sometimes the government can do something to help — and in those cases, it has to.”

Mr. Parker, from Harvard, said: “Wild fluctuations have made it harder and harder for the average American family to improve their lives. You need to strike a balance between freedom and security for your citizens. This is a democracy, but we need to pick between a market-led democracy and democracy-led markets.”

 

is it really like that?

 

It's like Peter Lynch said: If you take all the economists in the world and line them up end-to-end, it wouldn't be a bad thing.

 

From....itcanbedone....

This is a democracy, but we need to pick between a market-led democracy and democracy-led markets....


Good statement