US recovery might be a speedy one

Business Times - 23 Apr 2009

By PAUL SAMUELSON

THE best analysts on macroeconomics seem to agree on so little - and disagree about so much. After two years of such argumentation, the global economy definitely still is experiencing worsening of the business cycle.

Is credit tight? Or is it too easy? Paradox: Credit for ultra-safe asset securities is actually now dirt cheap. Just as the Bank of Japan for more than a 'lost decade' had to cut its official interest rate to virtually zero, most central banks everywhere now have to live a frenetic life: Credits are simultaneously both cheap and dear.

'Stagflation' is widespread from New York to Zurich to Iceland and Ireland. This means stagnant Main Street retail sales at the same time that the unemployment rates are still soaring.

I try to maintain a centrist view, consistent with what prevailed during the Great Depression of 1929-1939. Here are the main centrist tenets:

Unregulated macro-economies cannot heal their own wounds. The irrational public deregulation of 1930 by President Herbert Hoover - which University of Chicago economics professor Milton Friedman propounded throughout the 1940-2005 epoch - was predictably a road to disaster.

What then did end the Great Depression? No, it was not primarily a return to some kind of standard Federal Reserve stabilising programmes. Universal (rational) fear of investment loss led early on to hoarding. Hoarding by whom? Both rich and poor families hoarded, rather than spending freely on consumption.

At the time, my father-in-law was president of the First National Bank of Berlin, Wisconsin. After President Roosevelt closed all the banks in the first week after his inauguration, this Berlin bank was the only one allowed to reopen. Did that end hoarding? No. Mr Will Crawford subsequently invested mostly in zero-yielding 1933 Treasury bills. Such caution created essentially no new jobs for the unemployed.

That suggests that the global recession may continue into 2010. But with plentiful Obama deficit spending, stock indices will eventually stop falling in price. Few short-term or long-term Wall Street traders will luck out in their timing decisions. Typically, too, when the final recovery comes, it will be a speedy recovery.

There are few heroes among the speculators. Alan Greenspan began as one. But even he admits his fallibility. New Federal Reserve governor Ben Bernanke deserves our praises for his flexibility and caution.

In my view, the US is doing better than France, Germany, Britain, Japan and 40 other nations. This must not make us proud or overconfident. It was American financial engineers who originated the 2006 global meltdown.

Luckily, the US voters rejected George Bush's policies at the polls. Maybe luck did play a big role in that? We'll never know. -- Tribune Media Services

The writer is considered a founder of modern neo-classical economics and was awarded the Nobel Prize for Economics in 1970