Puntillo: This is an enormous problem. I don’t think that the government, President Obama, our key players, know exactly how big it is. If they did tell us what the dimensions could be, it could really hurt the level of confidence that is already quite damaged. We’re in uncharted waters.
Takahashi: This is something a long time in the making. It’s not something that should have been a surprise to us, given that two years ago people could not get a car loan, but they could get a mortgage. There’s something wrong with that. There were a bunch of indicators that suggested we were in a bubble. What’s not being said is some of what Obama has been saying, that we got ourselves into this and that we need to really clean up.
Wydick: I agree that it’s been a buildup over a number of years. The lynchpin seems to be when we allowed the financial sector to finance essentially what was a speculative bubble. We introduced systemic risk into the entire financial system. It was an oversight in the regulatory laws that allowed a company like AIG, who’s essentially insuring the mortgage market, to be so exposed to this risk and for Wall Street to be so exposed to this risk, that it could bring down in a matter of weeks these institutions that have survived 100-150 years.
Puntillo: It’s a regulatory failure, but it’s an investor failure also. Investors are supposed to understand that if AIG failed, they’d be affected. Then there were the retail borrowers, people buying homes that they had no capacity to pay unless the price went up. I’m old enough to remember that when you bought a home in California, you had to hold it for two years before you could ever get back the 6 percent sales commission, and we experienced 3 percent a month. It was massive failure all around.
Wydick: Investors who take risks are supposed to fail part of the time, otherwise they shouldn’t receive a risk premium. The problem is when that risk becomes systemized. That downside of individual investment decisions shouldn’t bring down the whole system. I think that’s where we got ourselves into a lot of this.
Wydick: The media has given very little attention to the crises that are brewing overseas right now. In China you have lines a mile long of people that have become unemployed from factories. You have political economies in Eastern Europe that are on the brink. You have a lot of the gains of the post-Soviet breakup that we thought were cemented in place, but who’s to know if you have rioting in the streets because of the international economy.
Puntillo: The experiment of the European Union is subject to possibly having some real difficulty. Maybe if you push it to the extreme, those countries could come apart in their agreements. If they no longer feel it’s in their interests to remain together, they won’t. It’s an artificial, relatively recent phenomenon. If the crisis gets worse and they start protecting themselves, we could have kind of a breakdown in Europe.
Wydick: The United States may be in better shape than Europe, because we have a strong central government that’s able to relatively quickly deal with these problems. Europe right now is just in paralysis with the European Union because it’s so difficult to get anything done with 27 different countries and decisions move much more slowly. There’s also much more fragmentation there.
Takahashi: The first lesson is that of cutting interest rates. You can end up in this liquidity trap, where there’s lots of capital, but people aren’t spending. Japan’s last good economic year was 1989, then they really muddled, which is what we’re doing right now. Japan tried cutting interest rates and if you factored in inflation, there was a negative interest rate. But there was no borrowing, there was no economic expansion. One of the mistakes Japan made was they went into tremendous debt by funneling money into the same types of programs that we want it to go into—social spending, building things. The difference between the U.S. and Japan is that Japan’s infrastructure was already pretty good. A lot of our infrastructure actually does need to be rebuilt. I’ve heard a lot of complaints about our deficit going up because of all this spending, and that we’re having big government, that’s going to be woe on us, and look at Japan, they did the same thing and look what happened, but I see the differences.
Puntillo: Japan has a debt outstanding to its GDP of well over 100 percent. Ours is probably moving towards 50 percent and we worry about these deficits, thinking ultimately interest rates will rise and the dollar will fall. In Japan, interest rates have been low for all the time that the deficit has gone up, and except for the last couple of months, the yen has been doing just fine. Everyone is crying wolf for our deficit, and yet we have the example of Japan and its currency has not collapsed and interest rates have not gone sky high.
Where Do We Go From Here? 1 2 3 4
Share This Article
Email Comments
As Printed PDF