Aspen Ideas: Is the financial crisis over? Depends on whom you ask
July 10, 2010
ASPEN – Three financial experts gave an audience at the Aspen Ideas Festival on Friday wildly different views on whether the financial crisis is really over.
David Stockman, former budget director for President Reagan, told the crowd to find a cabin in the mountains, stock it with canned beans and bottled water and prepare for even tougher times. The financial crisis will worsen instead of improve, said Stockman, who labeled himself “right-wing libertarian.” He was only half-joking.
“We’re not going to get out of this for years and years,” Stockman said.
Chris Hyzy, a chief investment officer with a subsidiary of Bank of America, called himself an optimist and said he sees slow but steady annual economic growth returning in 2012. The United States has moved from recession to recovery. Now it’s going to require patience to move from recovery to expansion, Hyzy said, but expansion will surely come.
In between was Roger Ferguson, a member of President Obama’s Economic Recovery Advisory Board, who said he is in the “sensible middle” in economic policy.
Ferguson said he sees a “low probability of a double-dip recession” and a “gradual but volatile improvement.” In that sense he agreed with Hyzy that the United States is out of the woods in the short term. In another sense, he agreed with Stockman that federal debt poses serious long-term problems. Fortunately, Ferguson said, Obama realizes the problems posed by federal debt and plans to address it once the economy is stronger.
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The economy was one of the major areas of discussion at the sixth annual Aspen Ideas Festival for obvious reasons. In the opening presentation on July 5, Harvard professor and noted contrarian Niall Ferguson, no relation to Roger Ferguson, claimed the recession likely marks the end of the American “empire.”
Stockman shared a similar vision of doom and gloom. We are not experiencing a normal cycle of recession and recovery because we are beyond the point of such normal cycles, he claimed. Instead we’re at the end of a “debt super cycle” marked by a 30-year spree of running up government and individual debt as well as the unprecedented government printing of money, he said. He fears the country has dug a hole it cannot crawl out of.
As proof, Stockman said the United States maintained “the golden constant” – a steady ratio of public and private debt to gross domestic product for 110 years, from 1870 to 1980. In the last 30 years, the debt has soared.
If the golden constant was in place today, the country would have about $23 trillion in public and private debt, Stockman said. Instead it has $53 trillion.
“We’ve been on the wrong track since 1980,” Stockman said. He was critical of Obama’s stimulus spending, which he said just adds to the problem.
Hyzy countered that he sees a world coming into balance thanks to the biggest global shift most people will witness in their lifetimes. Emerging markets, particularly in Asia, will create a middle class hungry for goods. The savings rate of countries like China will drop and consumer spending will soar. That will fuel U.S. manufacturing.
Contrary to Stockman, Hyzy credited the Federal Reserve for pumping money into the economy to help ease the recession. “I think we’re fortunate the Fed did what they did,” he said.
Stockman drew the biggest applause from many in the crowd of several hundred onlookers when he slammed the federal government, the central bank and Wall Street.
“I’m all for trust and confidence, but the problem is the great institutions of this country aren’t worthy of our trust and confidence,” Stockman said.
The budget of the United States is a “disgrace,” according to Stockman, and Congress won’t take meaningful action because of political paralysis. “Massive supermarket banks” are dangerous institutions that need to be broken up “because they can’t tell a straight story to the American people,” he added.
But Stockman offered his view for the country’s way out of its fiscal nightmare. Congress can help by taking no action – and letting the tax cuts of President Bush expire, he said. Means testing for need should be applied to Social Security benefits. And American should end its “imperialism” overseas.
Republicans will “wave their bloody shirt” in protest against the end of the Bush tax cuts, Stockman predicted, but prudent fiscal policy must prevail.
“We have to pay more taxes in this country or we’re going to go broke,” he said.