PRAGOTI

''The whole history of capitalism has had up-bubbles in real estate and down-bubbles after something different. This time the new fiendish Frankenstein monsters of financial engineering blinded the eyes and the minds of everybody.'' ''Rome was not built in one day, and Franklin Roosevelt did not get full employment. It took about seven years. Now I don't say it'll take seven years this time, but it won't be done with a balanced budget and it won't be done with "inflation targeting." Excerpts from an interview with Paul Samuelson

With the financial crisis that started in the United States triggering a global recession, Asahi Shimbun Senior Staff Writer Kiyoshi Okonogi interviewed distinguished American economist Paul Samuelson for his insights on what the world can expect in the days and weeks ahead.

The interview was conducted at Samuelson's office at the Massachusetts Institute of Technology. The 93-year-old Nobel Prize-winning economist and professor emeritus at MIT emphasizes the need for stepped-up and well-planned government spending to tide over the crisis, while lashing out at the deregulation policy pursued under what he calls "extreme right, supply side economics" adopted by former U.S. President Ronald Reagan and maintained by George W. Bush.

Following are excerpts:

Question: The current global financial crisis is said to be the worst since the Great Depression. What is your view?

Answer: I think it is definitely the worst crisis since the 1929-1939 Great Depression, both in America and globally, and I think it was an unnecessary breakdown as there was no need for America to have a meltdown. When George W. Bush became president in 2001, he inherited a country with quite sound (fundamentals) from President Bill Clinton with an overbalanced budget. Now this does not mean that there were not problems ahead ... (there had been problems) ever since 1981 when President Ronald Reagan took office. He was not a bad movie star but he brought into power a swing to the right. This is what we call "extreme right, supply side economics." And, from 1981 we trace the acceleration of the huge yearly balance-of-payments deficit of the United States, which is still going on ... . If you come back 10 years from now we will still have a very serious problem. I don't think we should spend much time discussing it because your house is on fire now (referring to the current crisis). But some time, whether it is eight years from now or 12 years from now, there will be probably a big run against the dollar and probably a disorderly run against the dollar. And when that happens, it won't just be foreigners who will take their money out of our markets. Our hedge fund people will be right there first in line selling the dollar short and buying up foreign currencies.

Bush worst U.S. president in over 200 years

Q: How much of an impact will the global financial crisis have on the Nov. 4 elections in the United States?

A: Now, Bush has done everything wrong in eight years. I'm not going to discuss Iraq or Iran or Afghanistan or North Korea. I'm an economist. I'm not an expert on geopolitics. But, he has lowered America's leadership role in the world greatly and maybe permanently. Voters are going to repudiate him and in all likelihood both Houses of Congress will be strongly controlled by the Democratic Party. This already happened after his first term in office. But this is almost the first time the Democrats have come back since Ronald Reagan's time, since 1981 to 1988. George Bush will go down in the history books as the worst president that America has had in more than 200 years. And, that couldn't have happened if the voters had not moved to the right. Now, aside from economics, which is my speciality ... President (Lyndon Baines) Johnson introduced Civil Rights ... equality in the law for black Americans. Immediately, all of the Democrats in the solid South moved to the Republican Party and that's part of the reason that for most of the last 28 years, since Ronald Reagan came to power, the Democrats have been the minority party. I think after November that will change and it will change for two quite different reasons, both very important. One is the Iraq war, which is a disaster. It's as bad as the Vietnam War and the Vietnam War entangled four or five presidents and there was no victory, and there can't be in the end a victory in Iraq and in neighboring places. Well, people don't like to see every night on television, a list of names of the new dead soldiers. So that alone would hurt Bush's reputation and his power. But the other reason is because people on Main Street in America are hurting. The reason they're hurting goes back to 1995 when Alan Greenspan, as the chairman of the Federal Reserve Board, made no efforts to curb the stock market bubble. So the American electorate is very unhappy. Free trade and globalization add to world productivity. It also adds to the potential standard of living of many people, but unequally. So, if Bush had been as wise as Clinton, you still would have from free trade a worsening of the situation of the lower middle-classes compared to the upper middle-classes and the very rich. Adding to that, we had what Bush called "compassionate conservatism," which is generous to millionaires and helping to make them billionaires. The trouble is, it is ungenerous to people below the middle. So with this meltdown November's election should certainly go toward the Democrats.

Fiendish Frankenstein monsters

Q: What is the major cause of the economic fiasco?

A: The whole history of capitalism has had up-bubbles in real estate and down-bubbles after something different. This time the new fiendish Frankenstein monsters of financial engineering blinded the eyes and the minds of everybody. The CEOs and the chief financial officers are the most surprised people. Nobody learned any lesson from Long-Term Capital Management. And what happens with this "new financial engineering" is an incredible "super over-leveraging" and you don't even know you're doing it. You know, it's as if you've been blindfolded. And nobody learned any lesson from that. Bear Stearns failed miserably. They were the chief brokerage company for Longboat Capital Management. They should have been able to see from the inside, but they didn't, and the head of it played in bridge tournaments. And this all could happen only because Bush, with his "compassionate capitalism" appointed incompetent people. The head of the Securities and Exchange Commission said I'm going to run a "kinder and gentler SEC." What did that mean to everybody? Reach for it. Nobody is going to penalize you.

Fragile capitalism

Q: So you're referring to the situation with less supervisory regulation?

A: Deregulated capitalism is a fragile flower bound to commit self-suicide.

Q: You have experienced and studied the Great Depression. What is the difference between the Great Depression and the current financial crisis?

A: Well, the present one in America is still primarily a Wall Street phenomenon. But right behind that is going to be a Main Street downturn, because all of the swollen population, aged 50 to 65, have lost from these subprime ridiculous mortgages. They've lost much of what they're going to need to retire. And when I say "lost," it's not something that the government can stuff back in. It's gone. And, it all traces to bad deregulation, to incompetent appointments, to conflict-of-interests appointments. Harvey Pitt, the first head of the SEC for George W. Bush was a lawyer to the four big accounting firms. The four big accounting firms do not deal from an honest deck of cards. They have tricks to keep things off the balance sheet and so forth. And, these are the new fiendish Frankenstein monsters (laughter).

Q: We saw so many bubbles burst in the 1980s, including the IT bubble, and now the housing bubble has burst. Why do you think the latest one is so serious? Is this a new crisis peculiar to the era of globalization?

A: This is a new crisis because if you look at its bottom it says, "Made in America" (laughter). It's not Thailand. It's not Mexico. It's not Argentina. It's America. And, of course, it spread from there. Could you believe that the whole country of Iceland is bankrupt? Icelanders were the happiest people two years ago. They're the unhappiest people today. What ended the Great Depression in Germany and in America? Deficit spending. I don't know whether we had helicopters in those days, but imagine a helicopter with a lot of printed money distributing it. When I was a freshman at the University of Chicago, I was a good student. I got good grades and I had great teachers ... Frank Knight (1885-1972), Paul Douglas (1892-1976) and so forth. However, everything I was taught and I read disagreed with what I saw outside the window of the university. At least one-third of the population had no jobs at all. It was exactly the same story in Germany. In 1933, Franklin Roosevelt gained power. Herbert Hoover was as unpopular as George W. Bush is. Adolf Hitler came to power in Germany. Hitler spent money endlessly preparing for a war of revenge and that ended the big unemployment in Germany by 1939. The same thing happened in the United States under Franklin Roosevelt ... through public works expenditures, through the agricultural support programs. My father-in-law was president of the National Bank of Berlin, Wisconsin. The first week that Roosevelt came into office he closed all the banks for a week. And then only the good banks were allowed to reopen. It was the only one allowed to reopen, and the reason was that he knew everybody in town they lent money to. But he wouldn't lend to anybody. He bought Treasury Bills that would pay like 37 cents for a three-month holding of $1 million (laughter) ... Treasury Bills. So it was not the central bank (that helped ease the recession).

Q: You're referring to what's known as the liquidity trap, which plagued the Japanese economy during our deflationary period from the 1990s through the early 2000s.

A: Yes, there are a lot of lessons for Japan. Before we are through with it (the financial crisis), nobody is going to worry about the deficit. If you have a big deficit (in Japan), you're not going to be a bad boy. You're going to be just like everybody else.

More deficit spending

Q: I wonder if we will experience a second Great Depression. Or, will we see just a worldwide recession?

A: Rome was not built in one day, and Franklin Roosevelt did not get full employment. It took about seven years. Now I don't say it'll take seven years this time, but it won't be done with a balanced budget and it won't be done with "inflation targeting."

Q: If I understand you correctly, you are saying that in the end spending policy by the U.S. government could help turn the situation around?

A: That's what saved capitalism in the 1930s. It also did in Germany. Franklin Roosevelt brought unemployment down from one-third to less than one-tenth when there was no war or threat. It was by PWA (Public Works Administration) and WPA (Works Progress Administration). Franklin Roosevelt, for more than seven years helped people ... handouts, rescues.

Q: What should be the appropriate spending policy this time around?

A: Yeah, but I don't know whether your roads, whether your railroads are or are not in need of new things. No foreigner can tell you what you should be spending on, but foreigners can criticize you after-the-fact if your spending is just guided by lobbyists with this faction in the Diet as against that one. If you're very foolish you will spend where the lobbyists want you to, like building bridges to nowhere. But there are plenty of things, from windmills to nuclear plants, that are useful and worth spending money on. Spending in the direction of the poor part of the population (is important) because those are the people who are most likely to re-spend. If you primarily spend in the direction of your millionaires, that won't make any difference.

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Paul Samuelson, born in 1915, was educated at University of Chicago and Harvard University. His book titled "Economics," which is based on an academic position that integrates neoclassical economics and Keynesian economics, has long been widely adopted as a textbook in many countries, including Japan.(IHT/Asahi: October 31,2008)

Courtesy: Asahi.com