6 Top Economists Explain Which President Is More Likely to Speed the Next Financial Crisis
Five years after the horrific financial collapse of 2007-2008, the economy remains fragile. No one is quite sure when another financial crash might happen. Five years? Ten years? There’s widespread worry, however, that whenever it comes it's likely to make 2007-2008 look like a picnic in comparison. A short list of some of our most urgent vulnerabilities shows that we could easily be plunged into hell once again unless politicians act responsibly and forcefully to avoid it:
- The financial sector remains bloated; price-fixing, money-laundering and monster trading losses illustrate continuing abuse and risky behavior in the banking industry.
- Too-big-to-fail banks are bigger and more dangerous than ever. Deposits are much more concentrated in the largest banks now than they were before the crisis.
- Politicians are embracing government austerity policies —commonly known as “belt-tightening” – that weaken the economy. That must inevitiably push down the value of many assets that banks continue holding on their books, even though they are assuredly selling off many mortgage-backed securities to the Federal Reserve, Fannie and Freddie.
- The housing market remains troubled and recovery efforts have often protected banks at the expense of strapped homeowners.
- Student debt is growing, now exceeding credit card debt, though a good chunk of these debts are owed to various federal government agencies.
- The unchecked flow of money into the political system means that the players in the financial sector are bribing the overseers of the regulators: Congress. And with bank compensation continuing to soar, regulators and congressional staff still know they can walk out the door to much higher salaries if banks perceive them as friendly.
- Unemployment remains high, and widespread chronic job insecurity imposes tremendous social and economic costs.
The two politicians seeking the White House have different views of how to handle these challenges. Which of their approaches is more likely to help us avoid the next financial crisis, and which would likely hasten it? I asked several prominent economists to weigh in.
1. Joseph Stiglitz, winner of the 2001 Nobel Prize in economics, and author, most recently, of The Price of Inequality:
“Austerity policies will make the economy more fragile, and because the banking system is not fully fixed, that could put the financial sector at risk. It’s absolutely clear that Romney and Ryan are much more wedded to austerity policies than Obama. Obama is more interested in a jobs program and providing stimulus to the economy.
"On financial sector reform, I think Romney has been totally disingenuous. In the first presidential debate, he criticized Dodd-Frank for worsening the problem with too-big-to-fail. If he were serious, he would have said something about breaking them up. But given where his support was coming from, he was not willing to tell us what he thinks. He was trying blame to Dodd-Frank for not breaking up banks, but what Dodd-Frank said is that if you don’t break up the banks, then we will put in place a framework in which shareholders and bondholders will bear the costs of failure. The intent of Dodd-Frank, and the belief of the Obama administration, is that they have put in place safeguards so that taxpayers will be protected: a living will, resolution authority, etc. That doesn’t prevent too-big-to-fail, and the criticism that I and many others have is that in crisis, we will blink and let the banks do what they want. But Romney’s criticism was totally wrong.”
2. William Lazonick, professor of economics at the University of Massachusetts Lowell and director of the Center for Industrial Competitiveness:
“Financial crises occur when the value-extracting activities of financial interests dominate the value-creating activities of productive interests. During his first term, we cannot exactly credit President Obama with waging war against the value-extractors on Wall Street and corporate boards. But at least, unlike Romney, he is not running on a platform that claims that financial manipulation, driven by individual greed, will restore prosperity to the American economy.