Worsening Economic Crisis Stops Short of Depression

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• JUDY WOODRUFF:

  Now, part three of our economic look, a Paul Solman conversation about the financial crisis with Nobel Prize-winner Robert Solow of MIT. He won the economics award in 1987.

• PAUL SOLMAN, NewsHour Economics Correspondent:

  Bob Solow, welcome.

• ROBERT SOLOW, Nobel-Prize Winning Economist:

  Thank you. Glad to be with you.

• PAUL SOLMAN:

  You've been around for a while. How bad is this?

• ROBERT SOLOW:

  Well, you know the famous phrase, "It depends what the meaning of 'is' is"? Well, it depends what the meaning of "bad" is here.

  As a financial crisis, it has got to be quite bad. Oh, it probably verges on the very bad. The worst aspect is that it has already begun to eat away at the health of the real economy.

• PAUL SOLMAN:

  Explain that, if you wouldn't mind. I mean, we have just as many people. We have the same land. We have the same structures. And we have more technology. So how can we be less rich?

• ROBERT SOLOW:

  Suppose I were some fabulously wealthy potentate, and I was considering buying the United States, but I wasn't really considering buying it until 50 years from now. In that case, the value of this bauble that I'm considering buying hasn't changed much.

  But what has changed is the short-run prosperity of the country. What happened in the course of the financial crisis is that the institutions, mostly banks, but also including insurance companies, and credit unions, and all sorts of that — of institutions whose normal business is to finance industry, to finance people who want to buy cars, to finance people who want to buy houses.

• PAUL SOLMAN:

  To finance farmers who want to plant, but…

• ROBERT SOLOW:

  Yes, and finance farmers…

• PAUL SOLMAN:

  … the crop won't come in for a while.

• ROBERT SOLOW:

  And they've been paralyzed. So businesses that would normally be investing in a new computer or a new fleet of trucks or whatever would need to borrow from that, and it can't borrow. And if it could borrow, it would be paying a very high rate of interest. They stop doing that.

  And then the real economy begins to slow down, and people lose their jobs because their firms can't sell. They can't sell to consumers. They can't sell to other businesses.

  And that creates the sort of recession that we probably have now.