Why Friends Don't Let Friends Vote Republican
The Mercury News Interview: Brad DeLong

Berkeley Lunch on the Financial Crisis

Carolyn Said:

UC Berkeley economists think through the crisis: Dissecting the global financial turmoil today, a group of UC Berkeley economists said that the situation is critical and the proposed remedies are inadequate. "Fixing this program is now very urgent," said Barry Eichengreen, professor of economics and political science. "It's time for the Congress and the public to come to their senses and realize there are more important things to say than 'not one red cent of my tax money to those fat cats.' What's at stake here is everyone's employment and prosperity, not simply the bonuses and golden parachutes of bankers."

Will the rescue plan now pending in Congress solve the crisis? "My answer is no," Eichengreen said. "It is best seen as a holding action. We have had a year of holding actions so far where the Federal Reserve has flooded the markets with liquidity and that hasn't solved the problem. The credit markets have shut down. The commercial paper market has imploded; inner bank markets have disapeared; companies are meeting their payrolls by charging their credit cards. ... Maybe TARP (troubled asset rescue plan) gives Treasury the wiggle room to surreptitiously do what is necessary - recapitalize the banking system by paying too much. It would be better to be upfront about what they're doing. I think there will have to be a Plan B."...

"[W]e cannot wait the time it would take for this stuff to work itself out," said John Quigley, an economics professor and interim dean of the School of Public Policy. "It requires prompt government action." He added that the proposal now wending its way through Congress is conspicuously missing a key factor: the chance for struggling homeowners to refinance into long-term fixed-rate mortgages. "This does absolutely nothing for the housing market," he said. "That's needed not for its own sake but to prevent a collapse in demand and consumption."...

The money crunch is particularly perilous because the U.S. economy needs to move 8 million workers out of vanishing jobs such as construction and tourism into new jobs and industries, said Brad DeLong, professor of economics. "Those 8 million jobs can't be created unless the funds flow through financial markets to expanding businesses - and they are not flowing right now," he said. "In the second quarter of 2007, we had $300 billion flow through financial markets to American nonfinancial businesses so they could hire workers and make things. We only had $150 billion, half of that, in the second quarter of 2008. We had even less in the third quarter of 2008. I think we might have zero in the fourth quarter. This is not a good situation to be in."...

Questions from the audience of Berkeley students and professors elicited some of the tartest comments. "Don't call it a bailout or a TARP," said DeLong of Treasury's plan. "I recommend 'seizure.' It should be 'the troubled asset seizure and forced bank nationalization plan.'" The question with the shortest answer also drew the biggest - and most rueful - laugh from the audience. Can a U.S. recession be averted at this point? "No," said DeLong as the rest of the panelists nodded in agreement.