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local take on the global financial crisis

Monday 16 February, 2009

I checked out this event put on by the Chicago Council on Global Affairs Maxed Out: How the World is Going Broke and Who Gets the Credit It featured Adolfo Laurenti, (AL) Sr. Economist @ Mesirow Financial, whom I interviewed for my column @ Midwest Business as well as Charles Wheelan (CW). The moderator sought to answer 5 questions;

Is the financial stimulus package the right medicine @ the right time?

  • AL-no, it’s too broad a package which eliminates hardship but doesn’t provide stimulus.  It bypasses the budget process & contains too much pork, too little for broadband (only $250M)
  • CW-the Senate might fix it by adding more infrastructure spending, but the process for spending on infrastructure is wrong.  We need better criteria for spending, such as improving congestion.

What’s the private sector’s role in the new New Deal?

  • CW-only the private sector drive economic activity.  We need to emphasize education to increase productivity.  Government can create short term demand, but the real question is how did the private sector fail itself?
  • AL-over the last several years we’ve developed economic imbalances by taking on too much risk, which has now resulted in panic.  We need to fix these imbalances in credit, etc. to move forward, but it’s unsure how fast we can get there.

How should we address commodity/oil/food price instability?

  • AL-as soon as demand picks up, we’re OK.  Some economies have managed quite well.  The problem is with those that were broken before the crisis & oil acted as a band-aid, such as Russia & Venezuela.
  • CW-we’ve seen extreme versions of economics which have changed behavior (we drove less when the price of oil went up).  We need a carbon tax offset by other tax breaks.

Should we really buy American?

  • AL-definition of buying American is changing.  Japanese cars made in America are as much or more American than Big 3 cars.
  • CW-we can’t ask consumers to buy more expensive American-made products, despite costing US jobs.

What should be the goals of the G20 meeting this upcoming April?

  • CW-don’t lapse into protectionism while continuing to fix trade, agriculture, & Kyoto.  We need to look past the G20 to new global institutions.
  • AL-rethink the World Bank, International Monetary Fund, etc.  as well as revise the Basel agreement on banking/finance to better coordinate monetary policy.

Q&A

  • bailout money is borrowed by the government, so there is some risk
  • although Europe is now the largest economy, it can’t coordinate its national economies as well because the European Central Bank doesn’t work the same way as the Fed
  • the Fed still has more credibility than Japan’s as long as it can deal with inflation later
  • the carbon tax won’t hurt lower income earners proportionately more if the offsets are structured correctly
  • green technologies can be economic drivers if the prices are right
  • 0 savings & living on credit are bigger problems than derivatives (Charlie’s dog was issued a credit card!)
  • the government should not step in to save banks before they get too big to fail because the regulatory pendulum will swing too far-survival is not a function of size or regulation
  • we should not return to the gold standard & continue to let the market set interest rates
  • the US should not become the Japan of the 1990’s because the US has more flexibility to liquidate its mistakes & address deflation faster

Watch a video of the event on C-Span: http://www.c-spanarchives.org/library/index.php?main_page=product_video_info&products_id=283870-1

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One comment

  1. This post got me thinking about inflation.

    After seeing Zimbabwe citizens forced to pan for gold since their money has become worthless because of hyperinflation caused by their country’s printing of currency, it’s frightening to think if this can happen in the US and in Europe.

    Glenn Beck already did his Al Gore impression on the hockey stick–but this time on hyperinflation caused by bailouts.



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