So is it fair to make a comparison to Japan’s experience?
Takahashi: We just don’t want to look to Japan and make the same mistakes they made by continuing to lower interest rates because lowering interest rates didn’t help them in the long run. Putting money into social programs isn’t such a bad idea in the case of the United States. In Japan, some projects were very foolish. But here we need the infrastructure in order to grow economically. We can’t let our infrastructure continue to go down the tubes and by infrastructure I mean everything, not just roads and bridges, but schools.
Wydick: Economics, macroeconomics in particular, is about at the stage physics was at before Isaac Newton came along. One of the things we do understand is that psychology plays a much more important role than had been previously built into models. My optimal decision in terms of investing or saving or consuming depends on what I see other people doing. If everybody thinks everybody else isn’t going to invest or consume, then neither do they. That brings about the role for government, which is to try and stop that downward cycle and give some people confidence that somebody is spending something. This makes the arguments about socialism or the arguments about the deficit getting bigger rather hard to hear for some economists. But we’ve already shot all our bullets with interest rates, so the only thing that’s left is fiscal stimulus.
Puntillo: They’re doing more than just fiscal stimulus. The Fed and the Treasury have been able to put money into the system in such a way that they’re trying to rehabilitate the financial system and trying to be a source of stability. They have pushed as far as they can on interest rates, but they’re building up a balance sheet, making sure they’re going to be able to buy loans and securities from various financial institutions and hold those so that the financial institution gets money to be able to lend again. They’re in effect providing liquidity, it’s a liquidity backstop. We have a wounded financial system and it has to be rebuilt. Stimulus won’t work if the financial system isn’t rebuilt.
Puntillo: There’s one case that was a total success. Most big corporations don’t go to a bank for their working capital, they basically borrow money in the capital markets in something called commercial paper. In that commercial paper market, when Lehman Brothers failed, everyone said, “Who will be next?” There was no ability to find somebody who would buy GE’s paper, Cisco’s paper, Apple’s paper, so the Fed stepped in. The biggest buyers were money funds, so the Fed kind of guaranteed the deposits in money funds, and they guaranteed deposits in banks, because banks are reasonably big buyers. That stepping in all of a sudden gave credence and now the so-called secured collateralized commercial paper market is almost back to normal when it was literally stopped dead. The question is if they solve this one, does the problem pop up over there? If they keep picking it off one at a time, rebuilding, maybe things will get better in the capital markets sooner, but that’s going to take awhile, and that shows up under the radar. That doesn’t make into the newspapers.
Wydick: I think it’s important for people to realize that literally the best people are working on this problem. It’s a question of whether even the right people can solve this.
Edwards: You’ve got an incredible team, but it’s like having a puzzle that you don’t have the box for, to see what the puzzle is. You’ve got these geniuses at the table trying to figure out what exactly the puzzle is. You might know what the corners are because they’re square pieces. People who understand the nature of the team may have a greater appreciation for what may be going on. But other people, the general public, will not have that confidence. The public wants to know if this is getting better. When are jobs going to be starting? When are shovels actually going into the shovel-ready projects?
Wydick: It could turn us into a very different kind of economy; moving away from employer-based health care coverage is one way. To tackle the deficit problem, you have to get at health care, Medicare, and Social Security. This will hopefully give us a chance to restructure our economy away from foreign oil dependence with these green infrastructure projects. We may also have a more stable financial system, one that has the right amount and the right type of regulation to check greed and keep bubbles from happening and that can just allow for steady growth and not get-rich-quick schemes.
Takahashi: This is definitely an opportunity, especially given the condition the United States is in across different areas—education, health care, infrastructure. We’re not in very good shape and we can use this opportunity.
Edwards: We may come out of this in a kind of revolutionary sense because the kinds of things that the president is talking about are really futuristic, very specific things like thinking differently about the environment, about transportation, about schools, about how we even equip schools. It may be a revolution in our society. What will emerge may be unprecedented, far-reaching, and I think society could become very much transformed.
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