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Transcript: Economists Hubbard and Summers on 'FNS'
Written by Chris Wallace / Published March 23, 2008 / Fox News Sunday
"FOX NEWS SUNDAY" HOST CHRIS WALLACE: With wild swings in the stock market this week, we want to continue our discussion about the troubled economy.
Joining us from Boston, Lawrence Summers, who was treasury secretary under President Clinton, and from New York, Glenn Hubbard, who ran the Council of Economic Advisers under President Bush.
Gentlemen, let's start with a brief assessment from each of you about the state of the economy at this moment.
Mr. Hubbard, how bad is it? How widespread is the problem? And how long do you see it continuing?
FORMER COUNCIL OF ECONOMIC ADVISER GLENN HUBBARD: Well, we've clearly downshifted in the past year from GDP growing about 3 percent to probably 1 percent to 1.5 percent for this year. The labor market has begun to deteriorate. The credit crunch is a very big deal for the economy. I expect it to subtract more than a percentage point from GDP growth this year.
Having said all that, I do expect a recovery in the latter part of this year fueled in no small part from monetary policy actions and fiscal policy actions.
WALLACE: Mr. Summers, relatively speaking, are you that optimistic?
FORMER TREASURY SECRETARY LAWRENCE SUMMERS: I'm a bit less optimistic. I think it's very likely that we're in recession right now. I think it's a certainty that we're in something that's going to feel like a recession to most people. I hope that it will be easily contained and we'll see a return to expansion.
I don't think after all that's happened in the financial markets we can be certain that that's the case. I'm glad to see that policy now seems to be responding to more aggressiveness after many months when policy was behind the curve.
WALLACE: Well, let's pick up on that, because the big news this past week, of course, was the Federal Reserve's intervention to prevent the collapse of Bear Stearns, including the commitment of a loan of up to $30 billion to guarantee risky mortgage securities.
Mr. Hubbard, did we pass some kind of important threshold in terms of government intervention this week?
HUBBARD: Well, I think we did. This is new territory for the Fed. In the heat of a battle with systemic risk, it may be important territory to pass, but it is a change.
I think what it heralds is more Fed involvement outside the banking system, which probably requires a change in our regulatory apparatus. Arguably, the treasury should be more involved here.
WALLACE: Mr. Summers, any concern — it seems not, because you were applauding more aggressive action, but any concern at all about the government becoming the lender of last resort on Wall Street?
SUMMERS: Sure. You've got to be concerned. And it's got to be coupled with an approach that focuses on regulation to prevent systemic risk.
Look, the focus of regulatory debates until the last three weeks led by the administration have been summits to organize deregulation, summits to take burdens off.
If we're going to be doing this, and I don't think the Fed had any realistic choice, we're going to need to have approaches that do everything we can to maintain systemic stability.
We've got more to do, though. We've got big issues of students not able to get loans, of municipalities that are struggling, of the people who are in a position to be able to afford homes not even being able to get reasonable mortgages at reasonable prices.
So there's a great deal that needs to be done to address the economic problems of the people, if you like, on Main Street after the very appropriate actions we've taken with respect to Wall Street.
WALLACE: Well, let me follow up. You figured out exactly where I wanted to go, because some Democrats — and you're a Democrat — feel that having now rescued, come to the aid of, bailed out — however you want to put it — Wall Street, that the government needs to do more to help out on Main Street.
As a matter of policy, not politics, do you favor the idea of the government getting involved, spending billions of dollars and buying up and refinancing some of these mortgages that people can no longer afford to pay?
SUMMERS: I think that that needs to be looked at very seriously to see whether it can be done in an effective way. There is no question that it's a major economic imperative to reduce the number of foreclosures.
And if the government, by stepping in and engaging in transactions where it could well make a profit, can contribute importantly to that, that's a very worthwhile effort for the government to engage in.
There are many, many technical issues, and they need to be studied carefully and with great care. But there's no question — there's some things that are very clear. We're not spending enough to help people get credit counseling to avoid foreclosure.
We're not doing enough to support state and local governments whose tax bases are being eviscerated by the process of foreclosure.
We've got a bankruptcy code where, if somebody's vacation home gets in trouble, they get more protection from the bankruptcy code than if a working person's principal residence goes underwater.
So there are a whole set of things we should be doing, that we can do, that will help to contain the pain in the housing sector, and I'd like to see us get moving and do them much more aggressively.
WALLACE: Well, let me bring in Mr. Hubbard.
Given the fact that the government intervened in the market on Wall Street, why not also intervene, do some of the things that Mr. Summers is talking about, especially to try to help out the 250,000 Americans who are in some stage of default and possible foreclosure?
HUBBARD: Well, I think the first things we need to do, and one the fed already has done, is try to bring liquidity back.
The second is to improve capital positions of the banks. You know, we're dancing around a big problem of the need to recapitalize banks. That's something that should be encouraged.
On the housing front, yes, I do think there's a reason to consider things ranging from, perhaps, a temporary expansion of the Federal Housing Administration to increased support for NeighborWorks America, for the kind of local support that Larry was referring to.
But I think we should be very cautious — very, very cautious — in doing much more.
HUBBARD: Well, I think we run the risk of creating a very, very large-scale and permanent program. A far better approach, it seems to me, is to figure out how we share losses among the three people who must bear them, which are the borrowers, the lenders and the taxpayers.
That's a discussion the treasury and fed should be leading right now before we talk about further intervention.
WALLACE: Gentlemen, let's turn to the issue of interest rates, and let's put up a chart, because it's pretty stunning. Since last September, the fed has cut rates six times, from 5.25 percent to 2.25 percent.
Mr. Hubbard, is that the right policy? And do you worry at all that it is driving down the dollar and possibly boosting inflation?
HUBBARD: Well, I think it's important to sort out two aspects of fed action. The one we've been talking about, about the financial stability aspects, liquidity provision, the new facilities, I think the fed deserves a great deal of credit for its activism.
I do think there is a danger that the current trend in monetary policy is too easy for the medium to long term and will lead to inflationary pressures and the problems in asset markets that you referred to.
After all, excessively easy monetary policy 2003 to 2005 was one of the contributing problems to the current situation.
WALLACE: Mr. Summers, how do you respond to that? And specifically, how does the fed balance its desire to fuel the economy to try to prevent a recession or, if it is one, make it smaller and shorter, with, on the other hand, the question — the concerns about the dollar and especially inflation?
SUMMERS: Policy is about choices. And because of what's happened, there are no terribly attractive choices.
In my judgment, the greater risks at this point are of recession, of recession that tips over into continuing crisis in a way that took place in Japan and several European countries during the 1990s. And so I think the fed has to maintain a bias to that side.
But Glenn is absolutely right in being concerned about inflation and being concerned about the value of the currency. And so I don't think there's any absolute. It's a matter of finding the best dial setting that you can.
As yet, I'm comfortable with the general direction of what the fed has done. But I think if we look back with regret at this period, it is much more likely that we're going to look back with regret at extra unemployment, extra people losing their homes, communities having suffered because not enough was done to contain the situation, than that the rate of inflation has picked up.
But they've got to be on top of every indicator, and certainly it would be helpful to express more explicit concern about the value of the dollar.
And I have been sorry to see a little less coordination by the Treasury Department with other countries in containing this financial crisis, at least in terms of what's visible to the public, than I think would have been ideal.
WALLACE: Gentlemen, we're going to have to leave it there. Mr. Summers, Mr. Hubbard, thank you both so much for joining us and helping us understand this very troubling situation.
HUBBARD: Thanks, Chris.
SUMMERS: Thanks, Chris.
THIS SUNDAY: Chris will sit down for an exclusive interview with Senate Minority Leader Chuck Schumer (D-NY).