Richard Levin: Choosing the Right Tools to Build a Stronger Economy
HONG KONG, May 9, 2012 — Richard C. Levin, Frederick William Beinecke Professor of Economics and Yale President, recently joined the Asia Society Hong Kong Center to share his views on the causes of the 2008 financial crisis in America and its global effects. As President of Yale, Levin helped establish Yale-NUS (National University of Singapore) College in Singapore, and he also serves on President Obama's Council of Advisors for Science and Technology.
Levin structured his discussion into five questions regarding the financial crisis, which he proceeded to address systematically: What caused the crisis? What could have prevented it? What could have been done afterwards to speed the flow of credit? What could have been done to stimulate the real economy? And finally, what should be done now to speed the recovery process?
"I'm going to take an extreme position on this," noted Levin in response to his first question. He recognized the blame placed on the personal greed of bankers leading up to the financial crisis, and disagreed that this played a fundamental role in the collapse. Instead, Levin placed the blame squarely on the U.S. government's carelessness and laxity with credit approval, compounded by continually and inappropriately low interest rates. According to Levin, the government "paid no attention to the accumulation of massive debts. Only twice before in our history had the accumulation of total debt reached 250 percent above the GDP. In 2008, it reached 360 percent." This was almost entirely private debt.
Levin proceeded to argue that the crisis could have been averted by better monetary policy, and perhaps a broader mandate to solve issues as they arose. Had the government perhaps seized the banks and temporarily nationalized them ("A word that in America is profane," Levin joked), it might have been able to move faster to restore the flow of credit in the country, and to unwind the large banks' bad assets slowly.
What could have been done to stimulate the real economy? "This is where my real passion lies," Levin told the audience. He argued that Obama's stimulus package "was too small and used the wrong tools" — namely tax cuts, transfers to state government, as opposed to direct job creation. While the tax cuts may have helped the nation to pay down its personal debt, they did little to encourage debt-ridden citizens to start spending. Direct job creation, Levin said, would have created "a quantum leap in spending." Had more money gone to existing infrastructure projects in order to absorb more workers, the impact would have been immediate.
What now? Levin suggested "a short-term investment program in infrastructure and research that puts people to work quickly, coupled with a long-term fiscal balance. But this is very hard to do politically," he acknowledged.
In closing, Levin offered some solutions for speeding the recovery process and preventing recurrence: monitor the amount of debt; use the full range of monetary policy tools to prevent excessive leveraging; avoid irresponsible fiscal policy; recognize the inefficiency of tax cuts; invest in the quick creation of jobs. "And finally, most radically," Levin asked, "What if democracies had a standby emergency fiscal body? Some commission which had the authority to act on taxes and spending in a crisis?" The political viability of his proposal is open to question, but Dr. Levin made a convincing case.
Reported by Maddie Gressel
Video: Watch the complete program (1 hr., 1 min.)