Week of 3.13.09
Transcript: Previewing the Superpower SummitBRANCACCIO: Are they going to fix this thing or just keep talking about fixing the world economy? Starting this weekend and culminating in three weeks, world leaders are sitting down to figure out what to do in the face of the worst global downturn in 80 years. New rules to clamp down on the excesses of banking and finance. New ways to prompt a global economic stimulus. Or not, depending on the level of political backbone. Here to help us understand the enormously high stakes is Harvard economics professor Ken Rogoff. He's the former chief economist at the International Monetary Fund and has spent a lot of time learning the lessons of previous financial catastrophes.
Our conversation is part of a continuing beat at NOW—"Out of the Woods—Rebuilding After the Great Collapse".
ROGOFF: The big problem that they can't figure out how to solve is, while we were sleeping, they let this banking system grow and grow and grow. And they've provided these guarantees and said not to worry. But in—in a lot of European countries, the banking liabilities are—the—their—what they owe, are three and five times national income. So, they—they can't guarantee them. And, so, they're—many of the policy makers are now really, like, you know, deer caught in the headlights of this storm. They don't know what to do. They don't have a clear picture. There's a mammoth recession going on. But in some sense, if you step back, that's manageable. We have booms and we have downturns. What's scary about this is that the financial system has imploded. And you can't get going again without fixing it. So, if they're gonna fix it, they gotta tell us where we're going. Where are we going in four or five years? Where do we want to be?
BRANCACCIO: Ken, this financial disaster, from a Financial Times editorial this very week, represents, quote, "The intellectual and moral failure of those who were in charge. A failure for which there is no excuse," the editorial argues. So, with the group of 20, the G20 meeting, essentially, now, do you think now they're going to repair the rules that led to this?
ROGOFF: I don't know. I mean, it's hard not to get angry. I mean, this is just a once in hundred years meltdown. It's awful. And you see we lived in this gilded age before where these people were getting richer in a way—you just can't imagine. And we had these policies that just sort of stoked it. I don't quite know I'd say, "moral." It's a little strong for the policy makers. Certainly intellectual. And they thought this time was different. They thought, "We're the United States. We're special. We can do this. We can borrow lots of money and somehow magically get away with it."
BRANCACCIO: Trees keep growing to the sky. Property values will always keep going up.
ROGOFF: It's just incredible that with house prices doubling in five years, just off the charts of things we've ever seen, that you would have the head of the Federal Reserve, the U.S. Treasury Secretary, our leaders going and saying, "This is fine. This is financial globalization. It's just that we're doing a good job." I—it's—it's hard not to get angry.
BRANCACCIO: Now, Ken, you've spent a lot of time rigorously studying other financial crises. What does history show us? Is the current one fitting a pattern?
ROGOFF: So, my work's with Carmen Reinhart at the University of Maryland. It certainly is. I mean—Carmen and I would say we're just driving down the tracks of a typical super deep financial crisis. Good news, they do end. I mean, not for a while that they're gonna end.
BRANCACCIO: But—but—but some day—
BRANCACCIO: —we'll come out of this?
ROGOFF: —Some day we'll come out of this. I mean, what—Carmen and I find is maybe it might take four years to get back to where we started, in terms of our income when this is over.
BRANCACCIO: Four years?
ROGOFF: Four—four years. So, and maybe at the end of, you know, 2011, we'll be where we were at the end of 2007. I mean, that's sort of the typical post-war trajectory. I wouldn't be surprised to see unemployment reach 11 or 12 percent. Maybe taking till 2011. Housing may not hit its bottom for another two years—same with equity prices. This is a very deep—recession. But, at the same time, I mean, I have to emphasize "If we wanna know where we're gonna be four or five years from now," it'll be over. And we'll have lost growth. But, you know, the—growth isn't just an end in itself. We lived pretty well 20 years ago, in the United States anyway. We have to get back on our feet so at least we get there.
BRANCACCIO: No, it's just difficult. I mean, you're a tenured Harvard professor. And there are people who—their jobs can't wait till third quarter till 2011. They're lookin' for a job, Monday, is what they're looking for. There's not much you can tell 'em.
ROGOFF: It's—it's a very tough market. I say, especially for young people it's been very tough. It's—it's—it's a very, very difficult and stressful—situation. I—I think it's gonna prompt a lot of social changes. I mean, I'm an economist. But I would say this year's story is the economy. Next year's story's really gonna be st—start to be more and more the political fallout, as people realize how bad this is. And they're gonna get angry. You—you—you started out and read that angry quote from the Financial Times. That was like nothing compared to, you know, th—things we'll see, I think, a year from now. And that's in the places where it's civil. I mean, I think they're gonna be parts of the world that—China's very—un—could be unstable. Russia. Latin America, where—where it gets a lot uglier. It's a—I—it's a very frightening—prospect.
BRANCACCIO: So what do you think? This process with the group of 20. First the finance ministers, then the big guys and women, in early April. Is that something our children are gonna read about in their textbooks about what happened in 2009? The big response to the economic crisis?
ROGOFF: I'd like to say yes, David. I'd like to say this is the turning point. It'll all be solved. But I think they're still sorting it out. It—frankly, these G20 meetings are huge. And I don't think they really do sort things out. They ratify deals that they had. And I don't think we've had the big deal yet. But it's important to recognize the global nature. They tell each other about their problems. I mean, I think it—I've sat in on the deputies meetings of—of these for the—finance ministers and central bankers. And it's pretty sobering, I think, even for these very well informed people, to listen to somebody from China explain what's going on. Or from India. Or from—Britain. So it's—it'll—it'll—it may energize them to move. But I'm skeptical that this is the big moment. I'm just not seeing, in the tea leaves, a readiness to do the moves necessary.
BRANCACCIO: Now, cash, capital flows across borders very easily. I mean, that's the—central feature of markets—over the last hundred years. If you're gonna deal with this, you're gonna put in rules—for instance, to tell banks, "You have to have this much cash on hand in case your risky bets go bad," it's gotta be some sort of international set of rules.
ROGOFF: Well, that's absolutely right. I mean, we in the United States are used to doing it ourselves. And we make our rules. And everybody else does whatever they want. Here, we messed up. In some ways, we had the easiest rules. And the money poured into the United States. And we blew everything up. And now, if we put in really hard rules, all the money's gonna drain out. There needs to be some balance—across the world. And that means we have to work with our allies. We have to talk to people about what those rules should be. We can't just make them up ourselves. I—I'd also say having some kind of international regulation would give a little insulation from the politics. I mean, it was just so easy for the Congressmen to call up the regulators and say, "You're bothering my bank." "You're telling them they have to have more capital. You're telling them they're too risky. Go away." And it's very hard for the regulator in these good times and these boom times. And I think having some insulation in an international—international body would be a good thing.
BRANCACCIO: Well, the Europeans, in particular, are very keen on this. Finance ministers got together on a kind of letter that came out this week in advance of the meeting that's happening right now, calling for movement on this. But there is a sense among some experts that it's the US that's being a little bit cautious about—worry about over-regulating. Are they gonna work this out?
ROGOFF: Well, they have to say two years ago, Angela Merkel —of Germany said—"We need a little bit of transparency in the hedge funds and investment bank—I'd just like a little bit of reporting." I mean, now that would be considered nothing. But when she said it, she got her head handed to her by George Bush, our Treasury Secretary Paulson, Gordon Brown, the Prime Minister in the United Kingdom. She just got slaughtered. And now, you know, that's nothing. I don't quite know if the Europeans know what they're doing. But their instinct is right that we need more transparency. We need the regulators to at least know what's going on. We need light.
BRANCACCIO: You're hearing from a Congressman from, actually, these parts, Massachusetts, Barney Frank—Head of the—Financial Services Committee—he's interested in, for instance, transparency, as you mentioned. But also, he's talking about some sort of super duper regulator. Making the Federal Reserve—extra responsible for these financial institutions. Does that work for you?
ROGOFF: Well, we need to change our regulatory framework. We had the, sort of, potpourri of regulators. And you—each financial institution says, "Hmm, which is gonna be the easiest one to go to?" It's like playing parents off against each other. In fact, even in the same bank, they would have s—one arm of the bank got to one regulator. And another arm of the bank go to another regulator. Just in order to get the minimum regulation. And there certainly needs to be some coordination. I think it's a bit of an illusion to think that somehow, as good as the Federal Reserve is, they can magically make all this work. We may need, you know, a couple regulatory bodies with the different kind of financial institutions that we have. But, you know we—we—we clearly need a new framework—to replace the one we have.
BRANCACCIO: Last time there was a new framework guiding the world's financial system was after the cataclysm of World War II. This is another kind of cataclysm. But I suppose there's still a—a risk—that we don't get the new structure. That we end up a year from now, that nothing much has been done. Lots of words, no action. Are you worried about that scenario?
ROGOFF: Well, I think it's pretty likely there's not gonna be much—
ROGOFF: —decisive action for a while. Yeah. I mean, it's just too complicated. I—I'm pretty confident—call me crazy—but I'm pretty confident that in four or five years we will have something decent in place. I mean, this—is basically what needs to be done. It's pretty clear. You don't let banks take risks 30 and 40 times the amount of money that they have and tell the government they have to pay for it if something goes wrong. You—you know, don't have these complicated instruments that nobody understands, that don't have legal clarity, be traded off in some dark Neverland that then pour back into the banks. You—you have to have some basic rules and regulations. I think beyond that there is a fair amount of, you know, decisions to be made about how we go back to the future. How —how can we preserve some of the creativity that the Financial Sector has? It's not all bogus. It's not all Bernie Madoff. And how do we, you know, rei—reign in it some? I think that—that's a challenge. I think that—especially because of the international dimension that you mentioned, David, it's gonna take time. Even if Larry Summers and Barack Obama and Tim Geithner decided, "This is the blueprint, this is what we wanna do," you think we're gonna be able to convince everybody right away? I—I don't think so. So, it's gonna be a long, painful path. But I do think we will, eventually, get there.
BRANCACCIO: Something else the G20's been talking a lot about besides asking every country that can to spend money on economic stimulus is to—give more money—or make more money available to the International Monetary Fund. Now, you used to be the Chief Economist over there, right?
BRANCACCIO: So, that poorer countries around the world, really suffering in this economic downturn can have some way out. Is that a good idea? This talk of doubling the amount of money available.
ROGOFF: Well, sort of yes and no. I mean, the International Monetary Fund and the World Bank need to be reformed—their political leadership. They look like the world order at the end of World War II. I mean, it's a little bit like the Security Council in the United Nations. But the world economy's changed. China's huge. India's growing. Asia is 40 percent of world GDP and they have world income. They have maybe a small part of the vote in these institutions. So, what happens is, the Europeans, who are just way over-weighted in these institutions, they decide what they want. And the Asians say, "Well, I don't think so. And we have all the money. It's our ball and we're gonna go home." Also—even if you double the size of the International Monetary Fund, it is swamped by the size of these banking problems.
BRANCACCIO: It's that bad—
BRANCACCIO: For those smaller countries?
ROGOFF: Well, some of the smaller countries aren't that small. This could hit Hungary. Ireland's at risk. Countries like Italy. And—and it could go on. I mean, we're—this—this is gonna touch some big countries. At least we'll go to brink before this is over.
BRANCACCIO: Now, there are people—watching us right now saying, "Look, that's all very fine about changing the rules, more regulation." What people are concerned about is, "Will I get a paycheck from General Motors next Tuesday?" I mean, there's very immediate concerns that people have. They're looking for ways that policy makers can bring some certainty, optimism, whatever it takes to get credit flowing again so that businesses can start doing business deals. So, that hiring can start again. Is that, ultimately, what this discussion the G20 is having—is about? It's really about restoring confidence?
ROGOFF: I think part of the problems the politicians are having coming to grips with this is they won't admit how big it is. They just can't admit. I—I think it's at least a couple of trillion dollars that needs to get taken care of.
BRANCACCIO: In awful debt that may be worth—
BRANCACCIO: —virtually nothing.
ROGOFF: —to—to—to fix the banking system—
BRANCACCIO: To fix the banking system—
ROGOFF: —would be a couple trillion dollars. And—and instead, they say, "Well, we can do some fancy financial engineering." Which, of course, got us into this tro—problem. "And we can do it for a trillion dollars." And the trouble is, if you don't put enough money, if you're not decisive enough, you've done nothing. We're just still—that's—that's what's been happening, frankly. We've had these bold sounding measures that still weren't consistent with how deep the problem. And coming back to my work with Carmen Reinhart, if you look at other financial crises, we are probably gonna end up having eight or nine trillion dollars more in debt three years from now than we did at the start of this. That would put us at the norm for working these things out. E—a lot of it's coming from lost tax revenues, fiscal stimulus, and bailouts. And we—it's just taken so long for policy makers to realize that. Unfortunately, as the clock ticks, the bill, you know is going up.
BRANCACCIO: Boy, this makes life worth living. We get through this horrible recession. And at the other side of the recession, the eight or nine trillion dollar bill has to get paid for getting through the recession.
ROGOFF: Well, I—I mean, that's absolutely right. I mean, so that's a painful reality at the end of this. And I don't know what's gonna happen. I—I personally believe we're gonna end up deciding to inflate it away. I—not completely. But inflate it down. That's the time honor—
BRANCACCIO: Wait—hold on a second. A Harvard economist is telling me that you want some inflation?
ROGOFF: Well—certainly not in normal times. But this is a once in hundred years event. And it's not just that the government will have borrowed so much. But I don't think we're having an easy time cleaning up this toxic waste. So, right now, if anything, prices are falling. Making cost of paying these debts bigger. We probably need to have a surge in the other direction. I—I wanna be careful. I'm not saying—German—post World War I hyper-inflation.
BRANCACCIO: Where people are running around with Deutschmarks and a wheel barrow.
BRANCACCIO: You don't want that.
ROGOFF: But maybe '70's style. We m—I—I actually think we will end up doing that. It's a sad statement about our political system—
BRANCACCIO: Well, how do you make inflation? I mean—I guess you could give all of us a raise. But how do you m—how do you generate it?
ROGOFF: Well, my—former Princeton colleague—I—I had to office next to him at Princeton, Ben Bernanke, became famous for his—helicopter speech, saying we would just drop money from a helicopter on everybody. It's not quite. But—basically, we just keep printing it 'till we're blue in the face. And eventually, people don't want it as much.
BRANCACCIO: Now, Professor Rogoff, I have it on good authority that you're really good at the game of chess.
ROGOFF: Once upon a time I was a professional chess player, believe it or not.
ROGOFF: Yeah. Yeah. When I was a teenager, and a bit in college.
BRANCACCIO: So you're adept at thinking many steps ahead, I assume. So let's play this out. We know that many banks are in a feeble state. I guess that would be one word. Frail. We'll find out more bad information about banks as 2009 wears on? And then what's the next step after that?
ROGOFF: I think there's only one endgame to this, to use the chess analogy. Which is that—most of the large financial institutions have to go through some kind of bankruptcy. Now we can't stick them in a ten year bankruptcy, because we need them. So we have to have some accelerated—bankruptcy. I think, basically, we have to do that with most of the large banks. At the same time, we probably need some big amount of money to clean up all these toxic weird assets. It probably needs to be—done all at once. It—it's been very disappointing to me, with the new administration, who have a wonderful team—economic team, that they have not taken the bull by the horns—yet. They're sort of wishing it away. They wish the—economy would get better. You listen to their forecast. And even though they say things that are bad, but they're gonna get better soon. They're not gonna get better soon. And this problem's gonna continue. And if we leave the banks the way they are it's like our—our blood has too much cholesterol in it. It's not—or the arteries in our economic system aren't working. And we need to clean it out. And unfor—it's painful. It could make things worse for a while. But if we don't do it, if we don't clean up the financial system, we could be in and out of recession for a decade. And that's what happened to Japan. So it's—it's very painful. But that's the endgame. You face the music sooner, and you'll be growing again sooner.
BRANCACCIO: Is it possible that somehow a—amid this mess, it's an opportunity to come up with a World Financial System that's somehow more just or perhaps more equitable?
ROGOFF: Well, I—I think we've gone through this gilded age where everything was directed at consumption. To have a bigger house, more cars, more food, more everything. And, you know, I mean, eventually, we had to get on another track. And this is, sort of, like having a heart attack, basically. And forcing you to rethink your life. What are your values? What are you doing? And I wouldn't be a bad thing if as a society, that led to some rethinking. I—I—not someone who favors having government ram it down our throats and tell us what our rethinking should be. But we've ha—we definitely had this orientation where it was growth at any price. Who cares about the environment? Who cares about income in equality? And I—you know, I—I think it would not be at all a bad thing if it forces a rethinking. Which I think it will.
BRANCACCIO: Well, Ken Rogoff, Harvard economics professor, thank you very much.
ROGOFF: Thank you for having me David.
BRANCACCIO: Head over to our website to see what happens at the G20 meetings...and while you there, check out "Obama Watch." We got quite a reaction when we mentioned this last week: it's a place for you to track action on President Obama's many promises...and to share your own opinions.
We're leaving you now with an urgent reminder, because we can't have these conversations and do our investigative reporting without help from you. Please give generously to this public television station and help keep the station and now on the air. And that's it for now. From Boston, I'm David Brancaccio. We'll see you next week.
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