Economy Is Vulnerable to Another Major Event
September 14, 2009
The U.S. economy is better, but not yet out of danger, said David Wessel, economics editor for the Wall Street Journal. “I’m a little alarmed by the kind of euphoria and complacency that accompanies this declaration that the recession is over and we now have positive growth,” Wessel said at Gleacher Center on September 15, the one-year anniversary of the collapse of Lehman Brothers.
Wessel spoke during a Myron Scholes Global Markets Forum, sponsored by the Initiative on Global Markets and the Chicago Council on Global Affairs.
Unemployment is projected to remain at nearly 10 percent for 18 months, while the financial and automotive industries are “propped up” by the government, he said. “We’re in a very fragile state where people are beginning to breathe a sigh of relief that we’re not having a depression, and that is definitely something to be grateful for,” Wessel said. “But I don’t think we’re guaranteed that the economy is going to get what (Federal Reserve Chairman Ben) Bernanke calls ‘exit velocity.’ We’ll see if the private sector can come back and create jobs that are needed for people to have the incomes to buy things.”
Perhaps more importantly, the economy is “incredibly vulnerable” to another major event, he said. “The Fed is tapped out and we don’t have a lot of reserves,” Wessel said. “If something bad happens – another big bank or insurance company gets into trouble, there is a terrorist attack or a run on the dollar, or any one of a number of events that cannot be predicted – we’re not well-equipped.”
One year after the global financial collapse precipitated by the bankruptcy of Lehman Brothers, the U.S. has learned much about the government’s ability to save it from catastrophe, Wessel said. Today the Fed and the U.S. Treasury would choose to bail out such a large firm, he said.
“A year later, not to give them the power to close a big financial institution, short of bankruptcy, is really inexcusable of Congress,” Wessel said. “It concerns me because as the current euphoria spreads, it may be impossible for Congress to obey discipline. That is irresponsible and something to worry about, because we’re still vulnerable.”
Wessel praised Bernanke and the Fed for the “creative footwork” they performed to save the financial system even while dealing with the collapse of Lehman Brothers, AIG, and others. However, Bernanke did not see the crisis coming at least partially because officials lacked the “imagination” to believe the financial system of the U.S. and other countries rested on the flawed assumption that U.S. housing prices would not fall across the country, Wessel said.
“I’m confident we will be better than we were before at oversight,” he said. “But the issue goes beyond the intellectual to the political. Somebody has to actually have the responsibility of doing something if they see some analogy to subprime mortgages spreading throughout the system. They must have the power or stature to say, ‘You each may think you’re making a good deal, but as a group you’re putting us at risk and you have to stop right now. As of tomorrow you must have a down payment or at least income to buy a house.’”
Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance and Richard N. Rosett Faculty Fellow, extolled Wessel’s book, In Fed We Trust: Ben Bernanke’s War on the Great Panic, as inspiration for launching a whole new course on the subject. “If you were to survey the faculty here, you’d get unanimous praise for this book,” said Kashyap, a faculty director of the Initiative on Global Markets. “Many of us believe that this book will be the official record of the crisis before any of the whitewashing, spin, and reinterpretation comes out, because it was written in real time before people knew which way things were going to turn out.”