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You also find a big problem stemming from the jobless recoveries we keep having.
We don't fully understand these jobless recoveries, but the United States has been increasingly having them. After 1991, it took 23 months for the jobs to come back, while historically it's only taken about eight months. In the 2001 recovery, it took 38 months for the jobs to come back. The problem is, the U.S. safety net is geared toward a very short recovery — people get their employment insurance but by the time the benefits run out, the jobs have started to come back. In a situation where it takes longer for the jobs to come back, there's a real question of whether the safety net is adequate. So there's political pressure to do the job of the safety net with stimulus. You stimulate the economy in various ways until the jobs come back, regardless of whether it creates risks of different kinds. In the 2001 recovery, monetary policy was on hold for a really long time, mainly, in my view, because the jobs hadn't come back. The Fed was doing everything it could, including saying, If there is a dip, we'll come to your rescue with tons of liquidity. I think we are in a similar situation now. It is a real question, whether the kind of [loose] monetary policy we have is encouraging investment by firms and the growth or jobs or the kinds of risk-taking that led to the previous crisis.
What other fault lines are out there?
The first two: a ton of money into housing because of income inequality, and accommodative monetary policy because of the inadequate safety net, tended to push overconsumption fueled by debt in the United States. But there is another side to this, which made the problem worse: the rest of the world. The fault line here is that the fastest path to growth in the post-WWII world has been export-led. You've had a number of countries do this — Japan, then Germany, Korea, Taiwan and now China. The problem is that some other country has to step up to buy these big surpluses. In a sense, the exporting countries are looking for other countries that are willing to splurge and go into debt. In the 1990s, it was the emerging markets, the Latin American and Asian countries, and many suffered deep crises. In the 2000s, who were the countries that stepped up? The United States, the United Kingdom, Iceland, Latvia and of course now Greece, Spain, Portugal. These countries all ran large trade deficits and found that even industrial countries couldn't run them on a sustained basis and escape trouble. Even now, these surpluses are looking for buyers again.
How do you rate the financial reregulation coming out of Washington? Because what you're talking about doesn't sound like what Congress is talking about.
I would ask a more fundamental question than is being asked, which is, Why were markets so oblivious of the risks being taken? I would argue a big reason was because they believed the markets would be bailed out by the government, and that expectation has been confirmed, with the government intervention in the housing markets and the credit markets and the Fed pushing enormous amounts of liquidity. The primary thrust of reform has to be to convince the private sector you will never do it again. That you will, in fact, force the private sector to face up to the risks it's taken, to impose losses, including on bonds. There are some ideas in the Senate bill that go in this direction, but unfortunately there are some ideas that go the opposite way and entwine the government more directly in the financial and housing sectors. To me, that's extremely dangerous because it just means to be that we are again going to get into a situation where profits are privatized and losses are socialized.
But my main message is you have to take a bigger perspective of this crisis. I think there is too much of a focus on being punitive. Greedy bankers are a constant — what changed was the external environment. Yes, there are things we should reform within the financial sector, but we should also think about the forces outside of the system that are pushing it in the direction of trouble. Some of the regulations we're talking about are of the kind, Can the borrower afford to pay back his loan? Well, people should be making loans they expect will be paid back. If you need a regulation for that, then your system is totally broken. In a society that makes these sorts of loans the problem isn't just with the brokers or the bankers. The forces are much deeper and broader.