“Business cycles do end and there are natural processes and mechanisms for recovery,” columnist Robert Samuelson told a National Press Club briefing April 21, 2009. “If people have debts that they’re not comfortable with and they divert more of their current income to paying down their debt, at some point not everybody defaults…people become more comfortable with the debt level.”
Then they begin spending more. In the way of some classical business cycles, inventories decline and induce production, he noted. The remaining companies have to reorder, even at a lower level of aggregate demand. As their business begins to go up, they absorb some of what their competitors might otherwise have done.
Samuelson expressed confidence that central banks would not repeat the mistakes of the 1930s that exacerbated the Great Depression. Also, leaders now are more willing to “try to spend their way out of recession.”
Some people have substantial assets with good incomes with relatively secure jobs but are not spending now, Samuelson said. If the country reaches a point where the economy appears not to be worsening, that will be a positive sign and people may be spending more and be less risk adverse.
Possible Return of Inflation
As to whether inflation could resurrect itself through the Federal Reserve putting out so much money and credit and with the level of government spending, Samuelson thinks higher inflation is a risk from the amount of credit the Fed has made available. However, the Fed is aware of the problem and will face pressure to keep interest rates low if the economy begins to revive.
However, the political framework of this global economy doesn’t exist anymore because the current system lacks an underlying political foundation. In the first decades after World War II, the world economy was dominated by the United States, Western Europe, Japan, and a few other allies, Samuelson stated. They were linked through geo, military, and diplomatic relationships and were mostly democratic countries.
G-20 Represents Lack of Common Interests
Today the Chinese and Russians don’t have shared national, political, or military interests with the United States. The G-20 now is a symptom of the absence of a political system that basically undergirds our economic system and a danger that countries will pursue their own separate interests, in Samuelson's view.
Over the last 50 to 60 years, the United States has sacrificed some of it s narrow national interests on many occasions because it has viewed its long-term national interest as promoting an integrated world economy, he added. “I hope we can convince other countries to do likewise but you cannot expect a large country to consistently sacrifice its own national interest to benefit another country as a deliberate instrument of policy.”
The use of the dollar tends to raise its price on exchange rates because it is in demand. “On the other hand, we have a huge trade imbalance that’s essentially driven by the fact that dollar is overvalued on world markets and some countries, China among them and other Asian countries, have kept their currencies undervalued,” Samuelson said.
Impact of Glass-Steagall Repeal
As to the repeal of the Glass-Steagall Act, which had separated U.S. commercial banking and securities, Samuelson thinks retaining it wouldn’t have changed the current situation. The S&Ls could not survive the rise in inflation and short-term interest rates or the creation of money market mutual funds that became an alternative to depository institutions.
S&Ls could have kept their interest rates low and created a positive spread with their long-term mortgages but they would lose their deposits because customers would take their money out due to the low rates on CDs or savings accounts or passbook accounts and put it into something with better returns.
To remove this dilemma, the government ignored the poor balance sheets of the S&Ls and liberalized what the institutions could do in the hope that by creating more opportunities to lend at higher rates they would fill in this gap, Samuelson said.
The banks faced a similar problem that was not as acute. Therefore securitization markets became one way in which the market created alternate ways of channeling credit, Samuelson said. “There were huge pressures to get rid of this restriction in the United States because the market essentially had gone around it.”
Author William Greider, a former colleague of Samuelson at the Washington Post, takes a substantially different position, arguing essentially for a new banking system as a check on private commercial banks. Rachel Reeves, covering a recent speech of his in the April 4, 2009 Santa Barbara Independent, “Greider Slams U.S. Financial Policy,” wrote: “In essence, Greider argued, the banks are simply transferring their losses to the American taxpayer.”
John Seidenberg - John Seidenberg has worked on newspapers, newsletters, radio news, and produced specialized news publications as well as freelance ...
