“As one of the economists who helped create today’s newfangled securities, I must plead guilty: These new mechanisms both mask transparency and tempt to rash over-leveraging.”
So confesses Paul A. Samuelson, Nobel laureate and professor of economics at MIT. Masked risk prompted heavy purchase of mortgage backed securities in the credit markets, and filled the coffers of big banks. The banks in turn started making loans like crazy. Add in a bullish real estate climate, post 9/11 interest rate cuts and you’ve got yourself record delinquencies and subsequent foreclosures.
Earlier this week, Mr. Samuelson not only confessed his role, he also gave us a frank primer on the root cause of the credit problem and what he thought should be done. He doesn’t think interest rate cuts will help much and claims today’s officials can not know if interest rates are too high or tool low. I think these are stunning confessions:
It used to be enough for a central bank to “lean against the wind.” That means lower interest rates when unemployment is too high and when deflation threatens. And when business growth is too brisk, central banks are supposed to raise their interest rates to dampen growth and to forestall price-level inflation that threatens to exceed 2 percent per year.
He thinks the up coming Christmas shopping season will speak volumes about what happens next year. If it’s flat he suggests credit infusion (the old print more money solution):
Watch developments closely. If America’s Christmas retail sales fail badly – as they could when high energy prices and high mortgage costs pinch consumers’ pocket books – then be prepared to accelerate credit infusions by central banks on the three main continents.
The article is an interesting read. Mr. Samuelson doesn’t seem to have too much confidence in the free market and he suggests new regulation and increased government intervention. I’m not sure this will necessarily help in the long term.
However, I’m just really happy to see some confessions and frank admissions of how much experts really know and how much the Fed can really influence the beast that is the American economy! It’s good to see them speak of their wayward ways. What’s interesting is we didn’t even have to torture them!
Mr. Greenspan you’re next.