2009 The Silfen Forum Transcript - Part 2

After the Fall: A World Transformed? - Part 2

Panelists: Amy Gutmann, moderator, Jennifer Amyx, Harold Cole, Don Kettl, Richard Marston, David Skeel.

Amy Gutmann: So we're not done. We're only done with my questioning. Now it's time for you to ask some questions. Who would like to begin?

We have microphones, so here, and introduce yourself. Why don't you begin? But you need the mic.

Keith Hoffman: My name's Keith Hoffman, I'm a senior, majoring in Political Science and English. There's a pretty broad consensus among all the panelists it seems that the recession will end by the end of the year, within a couple of years, which as a senior still doesn't really help me.

But I'm curious, what event, what kind of crisis of bungle could actually lengthen the recession in your minds or cause it to become a depression.

Amy Gutmann: Hal?

Harold Cole: Okay, so if we look back and try to learn some - there are some things we can learn from the Great Depression and actually it's a fairly negative lesson about the new deal. So there were a lot of positive things that were done during the new deal, and the country, political institution stayed intact, and that was a huge accomplishment.

On the other hand they put in place a very anti-competitive, sort of distortionary set of policies that are commonly called the National Recovery Act, the National Industrial Recovery Act, the National Recovery Administration, so I think one thing to have in mind is there is some very negative things that we can do in terms of intervening and interfering with the market working and my own research has argued that that was an important factor in dragging out the Great Depression after 1933.

Amy Gutmann: Don?

Don Kettl: One of the lessons is never to assume you can't make a bad situation worse. And we have it in our power to really make this one worse if we engage in massive protectionism in an effort to try to save American jobs. We could screw up the banking recovery and we could do that in a very big way. We could put a lot of anti competitive efforts, for example, in the way of the recovery in the restructuring of the auto industry, in the effort to try to save jobs in the short term in a way that could make the industry harder to thrive in the long term. We could really make a mess out of this unless we're careful and smart.

Amy Gutmann: So you mentioned protectionism. There is an American First aspect of the stimulus package. Jennifer, how is that going to affect the global response?

Jennifer Amyx: Well that has - the U.S. government has had to deal with that because we have the World Trade Organization that has rules against certain things, we're a member of that. Yeah, that has led to a lot of concern and the need for Timothy Guidther to explain those kinds of things. So I think that we need to avoid protectionism but also related to lessons learned, things like, as much as the public hates to see banks get money we know historically that dictating the terms of lending to banks doesn't always lead to positive outcomes over time, for example, so that kind of intervention I think we know also doesn't work very well.

Amy Gutmann: Up there, yes.

Aaron Warner: Hi, my name is Aaron Warner. I'm a senior History and Economics major here at Penn. My question is about the federal reserve. We talked earlier, you talked about giving the feds some grades. Now that the fed has taken a life line from the Treasury, many would call into question its independence. I'm wondering if you all would see that as a problem, or even if it's not a problem right now, if it could be a problem down the line.

Richard Marston: I think that we always have to worry about federal reserve independence and down the line when we're through this crisis, it's going to be very important to get back to normal business where a central bank sets monetary policy and has clear independence from the administration, and I think that will come in time.

But now we're in the middle of a crisis and it's absolutely essential for the Treasury and the Fed to be working together and I must say that that's been done from the very beginning of the crisis. Under the Bush administration with Paulsen as well as today with Guitner. Guitner of course, was the head of the Federal Reserve Bank of New York, so there's a natural transition here where we have Guitner in place at the Treasury and understands the problems, and he's been cooperating with Bernanke and the Fed from the very beginning.

Amy Gutmann: Terrific. Over here.

Yalo Pedaside:  My name is Yalo Pedaside, and I'm unusual, I'm a Professor of Pediatrics, so I'm a little off place here. My question is this - does the panel think that this problem is being coordinated globally, the address to this problem is being coordinated globally such that the remedies that we put forth don't have negative rebound effects across the world, especially in third world countries with dropping commodity prices, dropping oil prices, which is good for us, because we can pay less money but in the long term will America be able to recover if everybody else doesn't recover?

Amy Gutmann: So what is this doing to third world and other countries who, if they don't benefit from it, will be continued to see a worldwide problem.  At first, by the way, experts thought this was going to be a localized downturn but it's spread absolutely globally.

Jennifer Amyx: Precisely because securities markets aren't so well developed in developing countries and third world countries, but after the Lehman Brothers collapse, everything changed. I think that the best thing the United States can do for the world is to get our economy back on track, and that's what was said when Japan was in its crisis as well, because it's such a large market of consumer demand.

So if we just think about China, okay, there's a lot of talk about how China absorbs so many exports, but the final market for most the demand is that China is a staging area for a lot of goods that are, and value added on in China, and then exported on to the United States.

The downturn in the U.S. market has just huge consequences, not only for China but also for Japan, which is also an export oriented market. We have lots of economies that are still very dependent on exports to drive their growth, and that are now going to have to look more at internal demand but in the meantime, for them, one of the best things is for the U.S. to get the economy growing again for demand to be there.

Amy Gutmann: Would you say that's true for all third world economies?

Jennifer Amyx: In general, yes, yes.

Amy Gutmann: Over there?

Announcer: We have a question from one of our internet viewers. This is from the Facebook interface from the forum that was hosting by Knowledge at Warden. The question is, as a Penn Alum abroad, it strikes me that we lack the global institutions to deal with social fall out of the collapse and to rebuild our economies. Government response seems to be reactive, building programs on the fly, but I'm not sure that impactful programs are really shovel ready as American officials might put it. What are two or three types of institutions you think are important for us to start building now to deal with long term effects of this and other crises. It's from Robin Bowes, a Penn Alum in India.

Richard Marston: Well we certainly have the institutions. We have the World Bank for Direct Development Assistance, we have the International Monetary Fund to provide short term financing, the problem is that the financial markets, the securities markets have broken down as far as the emerging markets are concerned. They cannot get the financing that they normally rely upon. And the banks aren't going to provide it and the securities markets are not. And so there's certainly a role for the IMF to step in and provide assistance on a larger scale than they normally do. And there's certainly a role for the World Bank as well. The emerging markets are suffering. On top of that, the emerging markets that depend upon commodity markets are suffering even more and those are many of the emerging markets, so we have two things going on. We have the collapse of the export market, exporting to the United States and the Europe, and then in addition we have the collapse of the commodities market.

Emerging markets in particular are very much harmed by this crisis, and as a result, I would expect the IMF to be the lender of last resort in some sense, providing the kind of financing we need, but it has to be on a larger scale than normal.

Amy Gutmann: So, really...

Richard Marston: Yes.

Amy Gutmann: A large scaling up of IMF and World Bank responses, David?

Richard Marston: Yes.

David Skeel: And just to add one small thing to that, it seems to me this is a real stress test for the IMF and the World Bank. The World Bank in particular I think with the emerging markets doesn't step up to the plate, I think we're going to see a lot of regional authority stepping in so that in Latin America they'll try to handle some of these issues locally. There has been a lot of talk over the years of developing an Asian Development bank to kind of serve as a substitute for the IMF. But I think if the IMF and the World Bank don't step up, there's going to be a huge loss of confidence in them and people are going to turn to these other alternatives.

Amy Gutmann: So we have two - IMF and World Bank.

Jennifer Amyx: Just to sort of add onto this, the IMF actually, Japan already pledge 17 billion dollars to the IMF for a special fund to help countries that are hit by this crisis because one aspect of characteristic of this crisis is that it's not due to failed policies that these countries are getting hit. This isn't a result of failed fiscal policy or the kinds of crisis we saw in Latin America in the 80s or things like that. So the conditions for lending or for support through the IMF have to be different in this case, so we're seeing those kinds of discussions go on and some countries, such as Japan, who are net creditor nations still are able to give money even though their economies aren't doing so well.

Harold Cole: Could I add a little?

Amy Gutmann: Yeah.

Harold Cole: On this. First of all, the history on sovereign borrowing by developing countries is not a positive history and there's a lot of questions about it, and if you look at the lost decade in Mexico, and so when these countries go into default, and they ratchet up their debt and they run into these problems, the consequences are extremely negative. When we talk sort of very loosely about extending credits to these countries and loans to them, let's keep in mind what the negative history was. That's one statement.

I think just to put a slightly different perspective on it and I want to follow up on a comment that Dick made at the end, which is, a lot of what we need to do is to roll back our regulatory structure to what it was, you know, 1980. That's a negative statement about how much this, how negative this crisis is. I mean, and there's some other things that go with it but there's not a positive message on that.

Jennifer Amyx: I just want to take issue with one statement about emerging market countries because there has been no emerging market country that's just been clobbered by this crisis. It was due to a bad decision that was taken in line with the chronology of this crisis. I mean, this is something that hit every country around the globe, regardless of their history in terms of their sovereign debt funding, and we need to recognize that and realize that this crisis is centered to the United States and there are a lot of countries out there, a lot of people here are thinking about jobs and their pensions but there are a lot of other people out there in countries that have just been dropped below the poverty line, and the degree and the depth of resentment and frustration that this crisis is going to generate - or has already generated around the globe - I think is underappreciated in the United States.

We are much more like to come out of this recession and for our real economy to turn around much more quickly than Japan is, or ... well China is not going to stop growth but the slow down in growth has huge actual concrete implications for how society works, but many other countries are going to be feeling the results of this crisis for years on, and just to give you an example.

Amy Gutmann: We haven't - countries in Africa, a lot of the ...

Jennifer Amyx: But just an example would be Korea.

Amy Gutmann: Emerging economies are really going to be hit hard.

Jennifer Amyx: Right.

Harold Cole: She's right, the expert-led growth countries.

Jennifer Amyx: Yeah. So take Korea.

Harold Cole: They're getting killed.

Jennifer Amyx: So well why was Korea under so much distress this past year? I mean, partly because it's markets were more liquid, and the US Federal Reserve put in place a swap agreement with the Korean Central Bank in order to help them out at this point and time, and this was a case where actually, rather than regional institutions coming into play, the United States still has a really critical role to play in the world and it was appropriate, I think, given the source of the problems.

Amy Gutmann: Yeah, yeah.

Don Kettl: One thing that may happen out of all this is American autonomy in the world may not be quite what it was before. That one of the problems is we may not be able to roll back to 1980 because there may be a lot of other countries that are going to have real concerns about how we allowed us to be able to get them into all the trouble. There's going to be a lot more international push back in this as well.

Amy Gutmann: Yeah.

Don Kettl: The real answer to the question that came in, we have a lot of the institutions, what we don't have is consensus. There are a lot of other countries that are a lot less willing now to give us our lead to be able to set the course that others will follow.

Amy Gutmann: One question up there.

Patrick Star: Well the change, a bit of a change.

Amy Gutmann: Introduce yourself, please.

Patrick Star: Oh, my name is Patrick Star and I graduated in '79 from Penn and my question goes back to the core of what I think you've already said cause this which is the housing crisis and is this crisis that we're facing now a game changer in terms of America's economic development policies, which have bene based on a consumer society since the 30's and housing has been a critical component of that consumer society. Is this really going to change our economic policy? Is that what's been called into question here?

Amy Gutmann: So are we going to continue to be, or should we continue to be, if people do the right thing, the same consumer society we were before we got into this mess?

David Skeel: Well I would give different answers to those two questions. Should we be the same, I think the answer is no. Will we be the same? I fear that the answer is going to be yes. And a good for instance on that is our policy on housing, which Dr. Gottman referred to earlier. I think we really need to rethink all the subsidies that we give to people who are buying houses, and all the pressures we put on lenders to lend into the housing market.

Ask the question whether everybody can genuinely afford to have a house, and that's just one piece of consumer borrowing. You could say similar things, I think about credit cards and other pieces of consumer borrowing but it's not yet clear to me that there is going to be change after this passes. I think the verdict is still out on that.

Amy Gutmann: I said I wanted this to...

Harold Cole: I think that's huge unanimity behind what you just said.

Amy Gutmann: Right.

Harold Cole: And I think we'd all agree and just raise our, let me just make one quick comment, which is...

David Skeel: I didn't think we all agreed on anything.

Harold Cole: Well now, I thought, that one I thought the team was shoulder to shoulder.

Amy Gutmann: Hal, one quick comment and then I'm going to wrap up.

Harold Cole:  Okay, households have taken a huge hit in terms of the value of their homes and the value of their financial portfolios. That's likely to lead to some shifts in terms of their behavior to consumption vs. savings and the composition of their savings. So I would think there would be a response.

Amy Gutmann: This is a good place to end because it's about rethinking, and that's what universities are all about. So I hope this has been an aperitif to stimulate more thought about where we can go from this really historic crisis and now I just want to thank, once again, our panels of exports for a most stimulating afternoon. Thank you all.

Harold Cole:  That was great.