When Barack Obama is inaugurated, one of the first items on his legislative agenda will be an economic recovery package. By all accounts, the current economic crisis is one of the most complicated in American history, and fixing it will be no simple matter. We asked Benjamin Friedman,
the William Joseph Maier of Political Economy at Harvard University, for his suggestions on what to include in the package. Here's his response:
First, I would use the leverage that the Federal Reserve and
Treasury are gaining over banks and other lenders to encourage them, where the
word "encourage" is a euphemism, to encourage them to begin extending credit.
And the reason I say the Federal Reserve and the Treasury is that I'm referring
not only to the bank capitalization program, but also to the Troubled Asset
Relief Program,
and also to the various special lending facilities that the Federal Reserve
has set up on its balance sheet. And the idea is that through these various
facilities, the government is now putting an enormous amount of funds into
lending institutions, and my sense it that this level of support ought to give
the government the ability to encourage, where again that's a euphemism, these
lenders to begin lending again.
Second, I would go forward with another stimulus program.
And I would include four elements in it. One, I would include some tax
reduction, comparable to what they did earlier this summer. Two, I would
include a program of some public works--transportation systems most obviously,
but perhaps some others as well. Three, I would extend unemployment benefits.
And fourth, I would have some amount of grants to state and local governments
to help keep them from having to cut their expenditures as much as they
otherwise would. And my suggestion is $200 billion. I would split that
approximately half tax cuts and half the other things I've been describing.
One more step I'd take, which would probably be the most
complicated of all, would be to take action to give homeowners that have
mortgages that exceed the value of their houses incentives to stay in the house
rather than default on the mortgage and abandon the property. And there are
many different ideas floating around for how to do that, most of which aren't
very simple. Obviously, in the case where a lender made a mortgage loan and
retained the loan on their books, there's nothing complicated about that at
all--having a renegotiation between a lender and a borrower is the bread and
butter of what bankers do all day. But so many of these mortgages were not
simply kept on the books of whatever institution originated them. Instead, they
were sold and the mortgages were purchased by institutions that were putting
them in packages and securitizing the packages, and then the securities were in
turn used as collateral for CDOs or something else like that. And that's what
makes it complicated. There are lots of plans for doing this, and some have
merits and lots have demerits. But it's important to do something along those
lines.
--As told to Eric
Zimmermann