Economic Experts Suggest Causes, Next Steps for Economy

Global leaders are facing the worst economic crisis since the Great Depression. Though Lawrence Summers, on leave from Harvard Kennedy School and the Belfer Center to serve as director of the National Economic Council, predicted that the sense of "freefall" may end in the next several months, a recovery is likely to still be some distance away. Belfer Center experts offer their thoughts on where the situation is headed, and what policymakers should do now:

Paul Volcker
Member, Belfer Center International Council
Now: Chairman, Economic Recovery Advisory Board

• On government involvement: "We're in a government-dependent financial system; I never thought I'd see the day." (Wall Street Journal, 4/8/09)
• On international financial regulation: "In this world, I don't see how we can avoid international consistency..." (Bloomberg, 3/6/09)
• On money funds: "If they are going to talk like a bank and squawk like a bank, they ought to be regulated like a bank." (Wall Street Journal, 2/17/09)
• On the economy: "I'm not here to tell you the economy is going to recover very strongly in the short run. There is reason to believe that it should be leveling off, at a low level." (Bloomberg, 4/29/09)

Lawrence H. Summers
On leave from Belfer Center Board of Directors
Now: Director, National Economic Council

From the Financial Times, 4/9/09

• "The sense of a ball falling off the table - which is what the economy has felt like since the middle of last fall - I think we can be reasonably confident that that's going to end within the next few months and you will no longer have that sense of free-fall."

Paul Volcker (right), chair of President Obama's Economic Recovery Advisory Board, discusses the economic crisis at the Center's International Council meeting in April. Robert Taubman, a member of the Council, took part in the discussion.
Photo by Martha Stewart

Martin Feldstein
Member, Belfer Center Board of Directors
Now: Member, Economic Recovery Advisory Board

From Daily News Egypt, 2/26/09

• "The massive downturn in America's economy will last longer and be more damaging than previous recessions, because it is driven by an unprecedented loss of household wealth."
• "The fall in share prices and in home values has destroyed more than $12 trillion of household wealth in the United States, an amount equal to more than 75 percent of GDP. Previous reactions to declines in household wealth indicate that such a fall will cut consumer spending by about $500 billion every year until wealth is restored...The annual number of housing starts has fallen by 1.2 million units, cutting annual GDP by an additional $250 billion....So the U.S. economy faces a $750 billion shortfall of demand."
• "The stimulus package would thus fill less than half of the hole in GDP caused by the decline in household wealth and housing construction, with the remaining demand shortfall of $450 billion in each of the next two years causing serious second-round effects. As demand falls, businesses will reduce production, leading to lower employment and incomes, which in turn will lead to further cuts in consumer spending."

Niall Ferguson
Member, Belfer Center Board of Directors

From Niall Ferguson's web site, 2/12/09

• "The Western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burden."
• "The solution to the debt crisis is not more debt but less debt. Two things must happen. First, banks that are de facto insolvent need to be restructured-a word that is preferable to the old-fashioned "nationalization". Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalization after losses have meaningfully been written down."

Jeffrey Frankel
Faculty Affiliate, Belfer Center

From Jeffrey Frankel's weblog, 2/22/09

"There are four big lessons for economic policy from the 1930s:

1. Monetary policy - The Fed should respond to a severe loss of demand by aggressive monetary expansion, not by allowing the money supply to contract as happened in the 1930s.
2. Regulation of the financial sector - In times of financial crisis, many banks and especially their depositors will have to be bailed out; this recognition in turn requires a corresponding degree of regulation in normal times.
3. Fiscal policy - When a deficiency of aggregate demand leads to a serious and prolonged recession, the government should respond with intelligently designed fiscal easing, in the form of both spending increases and tax cuts.
4. Trade policy - President Hoover signed the infamous Smoot-Hawley bill in 1930. The consequences are well-known. Other countries instantly retaliated, and emulated this aggressive act of protectionism. Over the subsequent years world trade collapsed (down 60% by 1932), helping to put the "Great" into Great Depression."