Taming A Wild Economy

To fix a broken America, Roger Ferguson was one of the experts President Obama tapped. Now, this TIAA-CREF CEO and former Fed vice chairman shares his views about the financial markets and prospects for an economic rebound

Some critics have said that the economy would probably be better off if the Obama administration just stayed out of it entirely. and that the administration’s policies could hurt the economy in the long term.

As you well know, there are a variety of views and a number of critics. My judgment is the government had to get in, stabilize the situation, and get out as quickly as possible. The situation is not yet stable with respect to the markets or financial services firms, but I would like to see the government with a clear exit plan. I think everybody would.

Because otherwise it could be sort of like an occupation that just does not end.

Exactly. That is clearly inconsistent with the way the Obama government does things. I’m not a spokesman for the administration, but I assume it sees things exactly that way. My opinion is that the administration is not a group of people interested in having undue government influence in private markets whatsoever.

Historically, recessions have lasted 18 months on average.  How long do you see this downturn lasting?

Well, what has been interesting is recessions have actually been getting shorter and shallower for the last 20 years or so. This one has already proven to be one of the longest, maybe at this stage the longest, since the 1930s. It’s hard to know when exactly it’s going to turn. As I said earlier, we are starting to see some tentative signs of stability. Existing home sales and new home sales have both been slightly better than many had thought.

Certainly unemployment, which many people focus on, tends to be a lagging indicator, so that’s unlikely to turn before other things do; therefore, we should just be mindful of what to expect there. We are clearly seeing some stability in equity markets. I think many of the government programs to create more liquid credit markets have started to take hold. So there are some early and tentative signs that maybe the economy is starting to look for a bottom right now, but it will take some time for that to be confirmed.

Part of the stimulus plan is being criticized because so many jobs have been focused on construction. Are you in agreement with the Obama administration that there is going to be sort of a ripple effect and that this is actually going to have the desired effect within the span of time the administration is hoping?

I think it will have an effect within a reasonable time frame. I think it would be historical and highly unlikely for the government to be putting $787 billion of stimulus, plus trillions of dollars of liquidity in the markets, and not have that turnaround.

The U.S. economy, at bottom, is quite resilient. I think the big thing that makes this recession different from most others in recent memory is the combination of  macroeconomic events—a recession that was triggered by a rapid decline in housing prices and clear challenges to the financial services industry in terms of companies that may not have enough capital. This created a third leg: uncertainty and illiquidity in financial markets. This is circular, to a degree. Some of the loss of capital has been due to the illiquidity in markets, which means that market-to-market positions are being written down based on very stressed market conditions.

The government is attempting to attack each one of those three components and my expectation is––and I can’t predict exactly when––with the amount of money that is going into each one of those components, from the Treasury and from the Fed, that there will be the desired impact.

There’s a lot of uncertainty and fear out there with regard to government spending. One of the concerns is how the country will be able to pay for the Obama administration’s initiatives.

Well, there’s no question that some of it is going to have to come from taxes. There are also going to have to be places where the government spends less. And a fair amount of this money is for a short-term stimulus. The government’s 10-year plan clearly calls for pulling back and moving closer to balance when it comes to the budget.

From an economic standpoint, do you expect more of the same for the remainder of 2009? Are you looking at 2010 as a turnaround year?

I think there are some clear signs of a moderate turnaround toward the end of this year, but I think the risk around that might be too optimistic.

This story originally appeared in the July 2009 issue of Black Enterprise magazine.

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