Friday morning, October 3, 2008, the New America Foundation held an informal meeting of staff and interested others who listened to a presentation by Ellen Seidman, Financial Policy Services Director in the Asset Building Program. Ellen took about 25 minutes to shed a great deal of light on the roots of the current financial crisis; a historical perspective on the nation's current predicament; the strengths and weaknesses of the "rescue plan" passed today by Congress and signed into law by President Bush.
Ellen was also kind enough to take some questions from the audience and to allow the entire affair to be recorded for posterity. Since not everyone could be there, we wanted to take this opportunity to share some highlights of Ellen's presentation. Later, we'll post the entire event, but for now, here are some key segments.
First, Ellen talked about the roots of the current crisis. One of the most interesting items here is Ellen's perspective that the United States is currently facing three economic crises--one in the general state of the economy, one in liquidity, and the third in the credit markets.
Next, Ellen laid out the role of trust, and the importance of regulation, and how the lack of those matters can lead to a "drying up" of credit.
As Ellen points out in the second video clip, banks become unwilling to lend to their normal customers which results in huge problems for those customers and those effects ripple through out the economy. When banks that are well capitalized don't lend, they often park their holdings in Treasury Securities. However, this is not a solid long-term position for banks; they need to lend in order to make sufficient revenues to survive and prosper. However, a question remains as to whether banks have taken this position as a result of a perceived crisis or a real one.
The bill signed into law today was intended to restore the trust necessary for the credit markets to function. Here's Ellen on the contents of the bill--with a focus on warrants, executive compensation, and housing prices. (Oh, and just in case you come to wonder, "precatory" is a word; and Ellen uses it 100% correctly. Don't be ashamed if you have to look it up, I did.)
Following her presentation, Ellen took some questions from the audience. Marc Goldwein of the New America Foundation's Fiscal Policy Program asked "What would happen if the rescue plan fails?" Ellen responded with the turn-of-phrase-of-the-month, "Well, 'fail' comes in two flavors." The first flavor being the failure of the bill to pass the House. Ellen rightly predicted that the legislation would pass the House on its second try. The second flavor is the failure of the bill to have the intended effects on the marketplace and the liquidity and credit crises. Ellen referred interested parties to this Marketbeat post for a frightening, but plausible, worst case scenario.
Finally, Ellen was asked a question by Chen Yiqing of the American Strategy Program, "China had a state owned economy before 1979. After the country introduced free market ideas into the economic philosophy, it was termed “socialism with Chinese characteristics.” Today we see heavy US government interference in financial markets, almost like “capitalism with socialist characteristics.” Are these two systems converging between state control and free market capitalism? Do you see a boundary between the two systems?"
Here's Ellen's answer: