Former Federal Reserve Vice Chairman Alan Blinder & Glenn Hubbard, Former Chief Economic Adviser to President Bush Predict What's Next For The Economy
Tuesday, September 30, 2008
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SUSIE GHARIB: More analysis on what's the next for the economy. A short while ago, I talked to two influential economists: Alan Blinder, former vice chairman of the Federal Reserve and now partner of the Promontory Financial Group; and Glenn Hubbard, former chief economic adviser to President Bush and currently, dean of the Columbia University Graduate School of Business. I began by asking Blinder if the health of the U.S. economy hinges on a government rescue plan.
ALAN BLINDER, FORMER VICE CHAIRMAN, FEDERAL RESERVE: I think it does need this. The honest answer to your question is, nobody knows. The point is, that leaves open a large risk that the answer to that is yes. The kind of analogy I use is we find ourselves at the edge of an abyss, and yesterday, Congress decided to jump in to see if we would fall five feet or 500 feet. We're now sort of falling, and it would be nice if we could get back to the top again and not actually find out if it's 500 feet down.
GHARIB: Glenn, do you agree with that? Are we at an abyss?
GLENN HUBBARD, FORMER CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS: I do agree. I think it's very important to have a big intervention that can help restart credit markets. This may or may not be the best one, but it's at least a start.
GHARIB: What do you think is the key element, Glenn, that has to be included in any plan?
HUBBARD: Well, I think the key thing is to help recapitalize the financial system so we can jump-start credit markets again. It's not a Main Street versus Wall Street issue, it's both streets at the same time. Something that's really not addressed in the plan and really should be is direct intervention in the housing market. But the plan is, as I say, a start.
GHARIB: What do you think, Alan? What is the key element?
BLINDER: I agree with that. And actually, the plan was written loose enough, permissive and even words directing the Treasury to push some of the aid right to the level of mortgages, to buy up mortgages and refinance them. I think -- like Glenn, I wish more of the plan was focused that way, but it was a political compromise. There were a lot of hands in there, and I think there was sufficient authority given to the secretary to do those kinds of things, if he will do it.
GHARIB: Now we hear other suggestions, other alternatives like the FDIC raising the insurance limits on bank deposits. Are these solutions? Or are these just buying time?
HUBBARD: I think it's buying time, frankly. I mean, there might be some benefit in the near term for a very modest increase in the FDIC cap, but this is no time for a big change in policy, and in fact, could make matters worse.
GHARIB: Are we running out of time? We hear that businesses are having a hard time meeting payrolls and that people might be losing jobs. Do we need to have some kind of rescue plan before the weekend? Or can it wait a week or so?
BLINDER: I wouldn't wait a week or so. I think before the weekend, there is a reasonable target to look at. It's impossible to say. These markets are looking worse and worse. You know, people look at the stock market, and that is having a good -- that had a good day today, but the credit markets are just awful, and that's where the things that you are asking about actually take place, the normal financing for consumer activity, for business activity, and it's perilously close to frozen up now.
GHARIB: So, Glenn, do you believe that it's perilous, the situation, if we don't get a rescue plan? Will the economy go into a recession?
HUBBARD: I do think we need a rescue plan and I think we need it quickly. I agree with Alan, there is enough flexibility in this one that even though it's not ideal, it is a very good place to start. We're at a very, very dangerous point if we don't act.
GHARIB: Alan, do you have anything to add to that?
BLINDER: No, no. I very much agree. You know, in some sense, we needed this plan yesterday, and if we get it tomorrow, well, that's two days later than yesterday, but we ought to get it.
GHARIB: Do you think that lawmakers will be able to pull this off? Or is there just too much bickering going on in Washington that will prevent some kind of a plan?
BLINDER: I wish I knew the answer to that, and I don't. I'm one of the naive majority that thought it was going to pass yesterday and it didn't. They're scrambling to try to put something together right now including, possibly, as Glenn mentioned, doing some things with the FDIC that could be dangerous and certainly not addressed to the core problems. So there are a lot of straws in the wind and I don't know what's going to happen.
GHARIB: Glenn, do you think that Treasury Secretary Hank Paulson can steer us through this crisis? Some people are saying it's time for a new leader. Warren Buffett's name has been floated out of there. What do you think?
HUBBARD: Well, I think Secretary Paulson has taken a real leadership role in bringing this plan there. It has enough flexibility to do a great deal of good. And so I think we should wait for him to get it over the finish line and I think that will happen quickly.
GHARIB: Alan, do you agree with that?
BLINDER: I do. I mean, the horse is in midstream and swimming across the stream, and you've got to let the horse keep going. I would like to see, for example -- I mean, if I was controlling things, which I'm not, some eminent people like Warren Buffett, and I would add Paul Volcker, talking to the Republican and Democratic caucuses about the urgency of the situation, and what we need to do about it.
GHARIB: Gentlemen, thank you so much. Hopefully, we're going to get some.
HUBBARD: Thank you.
GHARIB: . good news on this in the next couple of days. We appreciate your time.
BLINDER: Thank you, Susie.
