Recession will change the US forever
Updated
This week the Governor of the US Federal Reserve, Ben Bernanke said the US recession could end this year if the Government gets its policies right.
That's a big IF. It means stabilising a financial system in ruins and saving or creating millions of jobs. And the economy, when it recovers, will never be the same.
Presenter: Karon Snowdon
Speaker: Dr Jerry Jordan, former president of the Federal Reserve Bank of Cleveland
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JORDAN: What people need to understand about the United States in this environment and probably the British as well that this is not your garden variety economic contraction caused by restrictive monetary or fiscal policies to slow things down and cool off inflationary pressures. That was none of this. Rather this is much more of a case that we went over the waterfall, we didn't drown, but we are not able to swim back up to the top and there's no amount of monetary or fiscal policy that is going to get us back up to where we were a couple of years ago. It's a matter of finding a foundation where we are and try to resume some growth from a much lower level of economic activity. We're simply a poorer society than we thought we were.
SNOWDON: Meaning this current cycle might lead to depression?
JORDAN: No, I don't think depression will be the right word. I think of it as a discontinuity from the growth path that we were on before. But the important part is that you cannot use pump priming of the fiscal type or the monetary type to get back to the level of car sales, furnishing, home appliances and others. There are literally thousands of stores in the United States that have been boarded up, companies bankrupt, out of business by the end of last year and they are not coming back into business. It's going to involve a new direction for the economy, but not a restoring of the old level of economic activity.
SNOWDON: If I understand you correctly, are you saying that the US will never recover its previous economic position in the world?
JORDAN: We will not recover to the same level of economic activity with the same composition. No one is trying to do that. They are moving in a direction in the components of what's called the fiscal stimulus bill is to take in a different direction in health care, in education, in the environment and the kind of resources that we use, the kind of energy that we use. The monetary authorities are principally focussing on trying to stabilise the banking system to keep it from further imploding.
SNOWDON: And the measures so far flagged by US policy makers, are they the right ones, will they work?
JORDAN: It's hard to say work without judging the political sentiment. The reading of last year's election results would say that a move in the direction of wealth sharing, away from wealth creation is being politically driven, is what people want. They want a different outcome than what we had from the 1980s, 1990s, with the focus on very, very rapid growth. It depends on what a lot Congress does with regard to this single minded focus on everyone should own a home, whether they can afford it or not. If they back off to a bit of reality, that may be some people should always be renters, then it would be different. But we don't know yet, it's too soon to tell.
SNOWDON: From what you're saying, what do you read will be the impact in Australia and more broadly Asia of the new America?
JORDAN: Well first, with the other countries, the creating partners of the United States that have relied on export-driven growth. They are going to have to rethink that strategy, because they find that they were left exposed to the ending of a consumer spending bubble. That then has secondary affects that come back on Australia, New Zealand and other countries dependent on selling things to other Asian economies. That is going to have to be rethought at a different strategy, but it's a indirect affect.
SNOWDON: And this new shape of things to come that we're talking about here, more sustainable in your view?
JORDAN: It will be more sustainable if we diagnose correctly what were the causes of this bubble and try to prevent a repeat of that type of thing. This is very different from the internet dot com bubble of the 1990s or of the corporate debt commercial real estate bubbles we saw in the 1980s. This is a consumer bubble financed by enormous amounts of consumer debt and that needs to be addressed differently than what we did before. You cannot fix it as easily and it remains to be seen whether we can get a lasting fix.
