Challenges to the Global Economy
Martin Feldstein, George F. Baker Professor of Economics, Harvard University; Simon Johnson, PhD '89, Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management
Description: If economic analyses earned ratings like movies, this event would receive an X for extremely disturbing. Two of the field's most prominent voices spare any sugar coating in their unsettling accounts of the world's unfolding economic crisis.
Martin Feldstein had a hard time choosing which of the innumerable problems to focus on, he admits, but ultimately settles on near"term challenges faced by the U.S. First off, this downturn is atypical; past recessions generally resulted from the Federal Reserve responding to inflation by nudging up interest rates and slowing the economy. This one involves two disparate but interacting problems: "the weakness of aggregate demand and the dysfunctional character of the financial markets." In laymen's terms, consumers are declining to spend money, the housing market's hit the skids; and banks big and small have no clue the value of their balance sheets, so they won't lend money to any but the best bets. There are some impressive numbers involved: The U.S. GDP is less than $15 trillion. A $12 trillion fall in household wealth (a combination of stock market and housing losses) has entailed a $750 billion decline in GDP.
The government's attempts to pick up slack in the credit market haven't to date brought private markets back to life, says Feldstein. "We're in a very awkward situation, where the Fed is moving well beyond anything a central bank has ever done before to act as a credit provider." The stimulus package doesn't come close to addressing the $750 billion hole in our economy: it's "a poorly designed program that delivers so little bang for the buck." Turning from "the bleak picture of the U.S. to the rest of the world," Feldstein sees a chain of events pulling all major financial centers down, leading to "a mutually reinforcing global recession." The nations most likely to avoid "being dragged down" by this crisis: China and India.
Astonishingly, Simon Johnson promises "to be quite a bit more negative." The U.S. banking situation "is much worse than what Marty said." The system needs a complete recapitalization -- a simple solution -- but practically impossible due to "the power of the banking lobby." Europe's banking system is even worse off (poster child: Iceland). European bank losses are dragging down not just banks, but entire nations. Their governments can't pull together fiscal stimulus packages, either. While "Europe is in denial," emerging markets like Russia have seen their reserves plunge, and are making stark decisions about "which of their people get bailed out." And don't think the IMF can come to the rescue; it has a meager $250 billion to loan, and is trolling for additional money from Western pockets, which just now have very big holes in them. Johnson's grim conclusion: Economists are reaching a consensus about the possibility of a very long period of slow or no growth: "There's a danger we could lose a decade."
About the Speaker(s): Martin Feldstein is also President Emeritus of the National Bureau of Economic Research. He served as President and CEO of the NBER from 1977"82 and 1984"2008, and continues there as a Research Associate.
From 1982 through 1984, Feldstein was Chairman of the Council of Economic Advisers and President Reagan's chief economic adviser. He served as President of the American Economic Association in 2004. In 2006, President Bush appointed him to be a member of the President's Foreign Intelligence Advisory Board. In 2009, President Obama appointed him to be a memer of the President's Economic Recovery Advisory Board.
Feldstein is a member of the American Philosophical Society, a Corresponding Fellow of the British Academy, a Fellow of the Econometric Society and a Fellow of the National Association of Business Economics. He is also a member of the Trilateral Commission, the Council on Foreign Relations, the Group of 30, the American Academy of Arts and Sciences, and the Council of Academic Advisors of the American Enterprise Institute.
Feldstein has received honorary doctorates from several universities and is an Honorary Fellow of Nuffield College, Oxford. In 1977, he received the John Bates Clark Medal of the American Economic Association, a prize awarded every two years to the economist under the age of 40 who is judged to have made the greatest contribution to economic science. He is the author of more than 300 research articles in economics.
Feldstein is a director of two corporations (American International Group and Eli Lilly), and an economic adviser to several businesses and government organizations in the United States and abroad. He is a regular contributor to The Wall Street Journal and other publications. Feldstein is a graduate of Harvard College and Oxford University. Simon Johnson is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., and co"founder of a website on the global economic and financial crisis, BaselineScenario.com. He is co"director of the National Bureau of Economic Research project on Africa and President of the Association for Comparative Economic Studies (term of office 2008"09).
From March 2007 through the end of August 2008, Professor Johnson was the International Monetary Fund's Economic Counsellor (chief economist) and Director of its Research Department. In 2000"2001 Professor Johnson was a member of the US Securities and Exchange Commissions Advisory Committee on Market Information. Johnson is an expert on financial and economic crises. As an academic, in policy roles, and with the private sector, over the past 20 years he has worked on crisis prevention, amelioration, and recovery around the world, in both relatively rich and relatively poor countries.
He is on the editorial board of the Journal of Financial Economics, the Review of Economics and Statistics, the Journal of Comparative Economics, and Cliometrica (a new Journal of Historical Economics and Econometric History). Johnson earned his B.A. from the University of Oxford, his M.A. from the University of Manchester, and his Ph.D. in Economics from MIT.
Host(s): School of Humanities, Arts & Social Sciences, Center for International Studies
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