Wednesday, January 28, 2009

How quickly the consumers can regain confidence.

From Justin Fox:

"
Wednesday, January 28, 2009 at 9:56 am


Davos cross-post: Three questions for Federico Sturzenegger

This is the first in a series (I hope) of three-question interviews from Davos. I've been stationed on the same sofa in the Davos Kongresszentrum all day writing an article for the magazine, but I did manage to have a chat this morning with the guy on the next sofa over, Federico Sturzenegger. Sturzenegger is a former Argentine economic official and dean of the business school at Universidad Torcuato Di Tella who after a couple years of visiting-professoring at Harvard was asked a year ago to take over as president of the state-owned Banco de la Ciudad de Buenos Aires.

What has surprised you most during the past year?

Perhaps how quickly the crisis emerged from being a financial crisis into the real economy. Last year at this time there was a financial crisis, but it had very little effect on the economy. Suddenly, after Lehman, it made a big impact in the real economy.

What are your biggest concerns looking forward?

How quickly the consumers can regain confidence. There's ample liquidity in the world, but everyone's hoarding it. As soon as consumers regain confidence I believe the rebound will be relatively strong, but the question is how long it will be before that confidence is regained.

Who's going to fix this mess?

The guy who's gonna fix that is time. No multilateral institutions, no governments. Central banks being able to provide liquidity is important. I believe [the impact of] fiscal stimulus is gonna be very limited. Providing liquidity is a key part of solution, but then it's just the passage of time.

I make a big emphasis on liquidity because if you go back to two biggest crises in 20th century, in the years after 1929 and in 1982, both had extremely tight monetary conditions. In the early 1980s in U.S., interest rates hit 20%. We're nowhere near that now."

And the reply:

  1. donthelibertariandemocrat Says:

    "The guy who's gonna fix that is time."

    The problem is that time doesn't fix everything. There's creative destruction of societies as well as businesses.

    The answers above are very good, but we do have to try things. Here are a few ideas:
    1) A stimulus of infrastructure spending: the perception of investing for the future at a societal level is important.
    2) Investigating and prosecuting Fraud, Negligence, Fiduciary Mismanagement, and Collusion.
    3) Tax cuts for business investment as an incentive for the diminution of fear and aversion to risk.
    4) A sales tax cut or payroll tax cut that is phased out in the future, encouraging some consumption now.
    5) Nationalizing some banks: only this will help dispel the notion that the banks are calling the shots at the expense of the taxpayers.
    6) Generous social safety net spending: we cannot afford any indifference to people's suffering.
    7) Doing anything to avoid deflation, which is disconcerting for most of us.
    8) Beginning to talk seriously about entitlement problems, which are, in fact, solvable.
    9) A more engaged and cooperative foreign policy. The historical and political context matters.
    10) Supervision of investments, not simple rules. We all know that rules will be gamed.
    11) An end to Credit Rating Agencies as they have existed. They, as well as incompetent bankers, cannot be seen to simply carry on as before.
    12) A recognition that we have a hybrid economy, i.e., a welfare state, and that the Investor Class believes in and expects government help. In other words, an end to faux arguments about the free market, of which we have a heavily government connected version.
    13) Adopting Bagehot's Principles, which will necessitate stating clearly who and what are guaranteed, quick application of moral hazard, and very onerous terms of bailout. In other words, nationalization.

    This is no time to give up. We have too much to lose.

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