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Cut up credit cards and rein in spending
June 17, 2009, Wednesday
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EDITOR'S note: This is the last of three articles about the causes of the current global financial crisis. Stuart P.M. Mackintosh is executive director of the Group of Thirty, and Allan H. Meltzer is a professor of political economy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute. The article is adapted from a digital video conference on Global Financial Systems hosted by the US Consulate General on May 14.
Q: We know that America's wrong fiscal and monetary policies are major causes of this crisis. Why did the US federal government enact these wrong policies? Is there a fiscal system and monetary system failure in the US?
Meltzer: Absolutely. Let's look at the history. We had 150 years of low deficits, surpluses, low money growth. Why did we do that? We had two rules that people believed in.
One was balanced budgets, the other was the gold standard. Now I'm not an advocate of either of those rules. But those rules worked to prevent us from doing the foolish things that we've been doing recently.
We have a president who says, well, in my administration, we're going to cut the budget deficit by half in the first four years. He doesn't say that when it's cut in half. It's still going be US$1 trillion, about 6 percent of the US GDP at that time. That's an enormous deficit. And it's going to be disruptive for us and for the rest of the world.
Mackintosh: We need to see a change in attitude by some of the policy makers and also by, let's face it, the individual Americans whose profligate ways and excessive consumption has to stop.
That does mean that the recovery will be slower and the growth rate overall will be lower, if the consumers actually pull back from this excessive consumption and start saving, which we all want them to do, but I think that's a reasonable price to pay.
Briefly on the deficit point, I agree that generally speaking, you can't sustain the deficit over 5 or 6 percent in the long term. It doesn't work.
Will we get all the way out of it without sensible, more prudent budgetary policies and also spending policies? Perhaps not. But, I still remain hopeful.
Q: Do you think we are at the beginning of the end of this crisis, or at the end of the beginning?
Meltzer: People are making a lot out of the fact that we haven't seen the bottom of the recession. All we've seen is a slowing of the decline.
We have a lot of problems facing us, commercial real estate problems, credit card problems. We haven't solved the problems of the banking system and we haven't solved the problems of the housing system. We have a huge - still a huge stock of unsold houses and we still have declining house prices.
The government needs to encourage people to buy the existing stock of unsold housing and I have been saying that, I got congressman to introduce that bill, and include it in the president's stimulus program.
Because the Democratic Congress is so much more concerned about distribution than it is about growth, they eliminated a big part of the stimulus to buy houses. What they did was, they limited it to people who are making their first purchases. I don't want to limit it to first purchases.
I want to clean up the stock of unsold housing because that's a major step toward improving the banking system and preventing additional failures, preventing additional mortgage defaults and getting the economy to recover.
Mackintosh: I think he's right. There are significant problems ahead in all the areas he talks about, at least potentially.
We should remember that on average, banking crises from peak to trough take at least six years, and if we accept that this started in 2006, that means that the US banking crisis won't be over until well towards the end of 2011.
I'm very sorry to depress you all, but I think we need to be realistic, so I would agree, we are not at the bottom yet.
Q: We know that America's wrong fiscal and monetary policies are major causes of this crisis. Why did the US federal government enact these wrong policies? Is there a fiscal system and monetary system failure in the US?
Meltzer: Absolutely. Let's look at the history. We had 150 years of low deficits, surpluses, low money growth. Why did we do that? We had two rules that people believed in.
One was balanced budgets, the other was the gold standard. Now I'm not an advocate of either of those rules. But those rules worked to prevent us from doing the foolish things that we've been doing recently.
We have a president who says, well, in my administration, we're going to cut the budget deficit by half in the first four years. He doesn't say that when it's cut in half. It's still going be US$1 trillion, about 6 percent of the US GDP at that time. That's an enormous deficit. And it's going to be disruptive for us and for the rest of the world.
Mackintosh: We need to see a change in attitude by some of the policy makers and also by, let's face it, the individual Americans whose profligate ways and excessive consumption has to stop.
That does mean that the recovery will be slower and the growth rate overall will be lower, if the consumers actually pull back from this excessive consumption and start saving, which we all want them to do, but I think that's a reasonable price to pay.
Briefly on the deficit point, I agree that generally speaking, you can't sustain the deficit over 5 or 6 percent in the long term. It doesn't work.
Will we get all the way out of it without sensible, more prudent budgetary policies and also spending policies? Perhaps not. But, I still remain hopeful.
Q: Do you think we are at the beginning of the end of this crisis, or at the end of the beginning?
Meltzer: People are making a lot out of the fact that we haven't seen the bottom of the recession. All we've seen is a slowing of the decline.
We have a lot of problems facing us, commercial real estate problems, credit card problems. We haven't solved the problems of the banking system and we haven't solved the problems of the housing system. We have a huge - still a huge stock of unsold houses and we still have declining house prices.
The government needs to encourage people to buy the existing stock of unsold housing and I have been saying that, I got congressman to introduce that bill, and include it in the president's stimulus program.
Because the Democratic Congress is so much more concerned about distribution than it is about growth, they eliminated a big part of the stimulus to buy houses. What they did was, they limited it to people who are making their first purchases. I don't want to limit it to first purchases.
I want to clean up the stock of unsold housing because that's a major step toward improving the banking system and preventing additional failures, preventing additional mortgage defaults and getting the economy to recover.
Mackintosh: I think he's right. There are significant problems ahead in all the areas he talks about, at least potentially.
We should remember that on average, banking crises from peak to trough take at least six years, and if we accept that this started in 2006, that means that the US banking crisis won't be over until well towards the end of 2011.
I'm very sorry to depress you all, but I think we need to be realistic, so I would agree, we are not at the bottom yet.
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