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Beyond the Jumbo crisis to a transformed world

(Shanghai Daily)
Updated: 2009-03-27 11:21

Most Americans don't need a university professor to tell them that the economy is in trouble.

Hard luck stories are everywhere, linked to the country's rising unemployment, snowballing foreclosures, skidding stock prices and billion-dollar bank bailouts.

But many still wonder when the tide will turn. Could the United States be on the cusp of another Great Depression?

And what should we do to make sure an economic crisis like this never happens again?

These were some of the questions a panel of University of Pennsylvania professors tackled last month at a forum titled, "After the Fall: A World Transformed?"

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While there was not a lot of consensus, the panel did agree on a few things. First, this crisis is big, it's bad and it probably won't be short-lived.

According to corporate law professor David Skeel, nobody really knows when the economy will bottom out, "but a consensus answer is that nobody thinks it's going to be over soon. It's not going to be two or three months. It's going to be a year, two years, three years, four years."

When the recession began is a bit more certain.

Although official numbers say it started in December 2008, the real drop in the economy began in September 2008, according to Wharton finance professor Richard Marston.

"In September, it got terrible and, as a result, consumer confidence fell, business confidence fell. In my view, that was the beginning of the recession."

The numbers bear that out. The bulk of the 3.5 million jobs lost since the beginning of 2008 came in the last five months, Marston said, adding that 600,000 jobs were lost in January 2009 alone.

"You're going to want to hope that you're a sophomore," Marston commented to the students in the audience, "because as far as jobs are concerned, I think it's going to be a bad job market through 2010 ... Next year is going to be a very tough year for jobs."

Most of the panelists agreed that job growth would probably not turn around before 2010.

Penn political science professor Donald Kettl predicted the economy might not regain its footing for another two years.

One of the biggest differences between now and the Great Depression is the breadth of the economic crisis, the panel agreed. Today's crisis spread quickly around the world, Kettl pointed out.

The current crisis also differs in some ways from previous banking crises such as Japan's in the 1990s, said panelist Jennifer Amyx, a Penn political science professor.

"The US crisis is much larger in scope because it had securitized assets," noted Amyx, referring to the process of bundling mortgages and selling them to investors who have no relationship to the borrower.

"One thing the US has done well is recognize the problem quickly," Amyx said, "but the US is not as well positioned going into this crisis. Japan had high savings rates. The debt was to Japanese households, not spread around the rest of the globe. The US has zero household savings ... We're relying on the kindness of strangers and foreign investors to finance the stimulus that we need to get us out of this crisis."

The inter-connectedness of the world's economy and financial systems has also made today's crisis more global than in the past. Problems caused by mortgage-backed securities spread like a virus through world financial systems.

Other countries, especially those dependent on exports to the US, are struggling to cope with a problem they didn't create. The degree and depth "of resentment and frustration that this crisis is going to generate - has already generated - around the globe is under-appreciated here in the United States," added Amyx.

And yet the US is more likely to come out of this recession more quickly than countries such as Japan or China. "Many other countries are going to be feeling this for years."

Because the crisis has spread worldwide, the United States needs to consider the global impact of the steps it takes to alleviate the crisis, panel members suggested.

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