No joke: four economists, no conclusion on the financial crisis

The corny joke about economists is that if you laid a thousand of them end to end, they would not reach a conclusion.

So, that outcome was to be expected Tuesday night, when the University of Minnesota arranged a row of four economists on stage at the Humphrey Institute for Public Affairs.

The forum’s topic was — you guessed it — the financial crisis. Specifically: What does this mess mean for our economy’s future?

The most certain response of the evening came from state economist Tom Stinson: “The short answer is: I don’t know.”

The panelists, however, had plenty of thoughts about how bad things really are (or aren’t), what’s to blame and whether the government’s response has been appropriate.

Besides Stinson, speakers included university economics professors V.V. Chari and Tim Kehoe and Art Rolnick, research director at the Federal Reserve Bank of Minneapolis.

Here’s a sampling of their views:

On historical comparisons: Don’t look to the Great Depression. Look to the late 1980s.

Over that period, the stock market tumbled substantially, hundreds of banks failed, and yet, “the economy did just fine, thank you,” Rolnick said. “It has been a very resilient economy. So I’m on record as being the optimist, and I really have not changed my view despite the financial crisis we’re facing now.”

On the stock market: Kehoe, who recently co-edited a book titled “Great Depressions of the 20th Century,” noted that the stock market’s 24 percent decline through last Friday doesn’t reach the magnitude of the October 1987 drop, when the Dow Jones fell 34 percent in two weeks.

“We still haven’t arrived at a crisis in the stock market of the sort that we saw in 1987,” Kehoe said. “And you all remember the Great Depression of 1987? No, no, you don’t because we didn’t have one. The stock market recovered. Within three years, it was back to where it was ahead of time.”

On the credit market: The data continue to show that claims of a credit crisis are overblown, Chari argued. While borrowing has become more expensive for some, the amount of money being lent by commercial banks has actually increased in recent weeks, he said.

The source for his claim is a weekly report issued by the Federal Reserve. The latest bulletin covers U.S. commercial bank lending through Oct. 1. It shows the amount of securities, mortgages, commercial and industrial loans have all increased. Surprisingly, he said, inter-bank lending has risen at its fastest rate in at least three years.

Rolnick said Chari’s observations raise some questions about the extent of the credit crisis, but he said Washington officials are getting information from Wall Street saying the credit markets aren’t working properly.

On who’s to blame: Plenty to go around. Fannie Mae and Freddie Mac helped build a “house of cards” by relaxing its standards for the mortgages it would buy from banks, Rolnick said.

Kehoe argued, however, that bad mortgages only amount to about a $300 billion problem. What caused the crisis to balloon to about $700 billion were credit default swaps, a type of unregulated insurance that let banks bet billions that these risky mortgages would pay off.

On a recession forecast: The economy was already heading into a recession before the financial crisis struck. The bailout bill and other efforts by policymakers won’t do anything to change that, Stinson said.

If anything, the billions of investment in the financial sector might reduce the severity of the recession, Stinson said. But “don’t think that we’re going to escape.”

Among the ominous signs: sales tax receipts for August in Minnesota were less than they were a year ago. Housing starts are expected to finish this year at their lowest level since World War II, Stinson said, and next year’s forecast is worse.

The big variables will be consumer spending and income, he said. Falling gas prices should have the effect of an economic stimulus. But will that make up for lost wages?

On the political response: The Bush administration has acted in this crisis the same as it has acted for the last eight years, Chari said. “The consistent message is: We’re grown-ups. We understand the real problems. You don’t. We need to go into Iraq. We need to spend $720 billion. Because we have the information that you don’t.”

The publicly available data don’t support the need for the type of bailout bill pushed by the president, Chari said, and if the administration has more telling data, it should be disclosed. Without seeing what they’re seeing, the bailout appears to be “remarkably unwise,” he said.

“They’re not telling us what we’re not seeing that they are seeing,” Chari said. “There is this nagging fear maybe they’re reacting to weird things in their heads.”

Stinson acknowledge the problem that many people believe they are being misled, but said he believes the threat to the economy is credible.

“This isn’t Mr. [Ahmed] Chalabi reporting visions of mobile bio weapons labs running around the streets of Baghdad,” Stinson said of a key figure in the run-up to the Iraq war in gathering information that turned out to be false.

Instead of a grainy satellite image in a Colin Powell slide show, what economists are seeing is a widening gap in the rate banks are charging each other compared to what the Federal Reserve charges.

On the bailout plan:
“Will we be successful? When will this get resolved? I think those are unanswerable questions at the moment,” Rolnick said. “I am confident that the underlying economy is strong. It doesn’t mean we’re not going to have a recession. We’ve had 12 recessions since WWII. That’s part of a market economy.”

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