Mumbai: Harvard University economics professor Martin Feldstein warns of a second slowdown in the US. “I am not predicting that we are going to have a double dip (recession), but I think it’s a significant risk,” he said in an interview. Edited excerpts:
What do you think of the fact that they (US administration) have been able to come up with this bank tax proposal so quickly to fix a problem that’s a perceptional problem? The very same administration has for sometime now been dragging its feet on doing anything about reforming or changing the financial regulatory system, which is actually where the bigger problem lies?
Absolutely right, but those are very simple proposals. The regulatory issues are very complex. Congress may not go along with this tax but it’s certainly very simple to describe and it’s something that the public can understand while the regulation of bank capital or leverage ratios—that’s a very complex issue.
Do you also think it’s symbolic in some sense of governments trying to fix the wrong problem?
This year the big problem was clearly the economy, it was the housing sector, it was the small and medium size banks, and they really haven’t fixed those problems. President (Barack Obama) has focused virtually all of his political attention on the healthcare issue...
Earlier this month you were quoted as saying that there is a significant risk the economy could run out of steam sometime in 2010. And you also have been as quoted saying: “I do not think the Obama administration is doing anything to reduce that risk.” Are you warning of a double dip?
I am warning a bit. I am not predicting that we are going to have a double dip but I think it’s a significant risk because it’s very easy to see the negatives in 2010...
The administration is not doing anything to deal with the fundamental problems of the small and regional banks, the availability of credit, the potential defaults on mortgages and on commercial real estate...
You backed the first stimulus plan even though you have been a critic of its efficacy to solve the real problem. Are you in favour of the second one?
What I backed was the idea that there should be one. What the President then did was to turn to Congress and say to them to go design it. What came out was not very good.
However, I am certainly not in favour of another one because I am afraid that if we had another one it would so frighten financial markets and individuals who would just be seeing the national debt growing faster and the deficits growing faster...This will make it harder to get the economy going. So we would more than lose through reduced confidence anything that would be gained from the direct impact of spending.