Stimulus is Too Small to Offset the Economic Decline

In an interview with The Daily Beast, economist Dean Baker, the co-director of the Center for Economic Policy and Research and a blogger at Beat the Press, says the stimulus is too small to offset the economic decline.

What do you think of the news today that the administration is crafting a public-private partnership to buy up toxic assets using investors' money?

I think the whole thing is an effort to try and conceal the fact we're giving them money. The basic point here is the banks are insolvent. They're bankrupt. They're doing an elaborate charade to avoid coming to grips with that fact. The obvious thing to do would be to take them over like we did with banks in the savings-and-loan crisis, reorganize them, and sell them to the private sector. That would be the obvious thing to do, but difficult partly because the financial industry has a lot of power and they don't want to put the current crew out of business—the shareholders would be wiped out, the execs would be looking for new jobs for the most part.

So you definitely favor nationalization then?

I think the term, and there's an aversion to it, is "bankruptcy." It's not like we're taking over banks because we want to seize them. It's because they're bankrupt and that's what happens to bad banks. It's a market outcome.

Are you worried about some of the concerns some have raised about such an approach—that investors might panic, thinking that their company would be nationalized next?

I don't see anything that wouldn't be there anyhow. Obviously there's always a risk banks could go under. In terms of the fear people might have, you'd protect the depositors and presumably most of the creditors depending on how bad the situation is. If it turns out the losses are big enough, you may not honor them 100 cents on the dollar. In the event the losses end up exceeding capital by some large amount, we may say 90 cents on the dollar or 80 cents. In principle, you'd structure it in some way in which there are punitive measures for those who don't own up. You want to see who's clean and who isn't—the ones who are clean, they're fine. We're taking over the banks because they're insolvent, not because we want to. Once we do this, in principle, people should have much more assurance that the other banks are solid, since they weren't taken over. In principle, what we'd want to do is have some requirement that the executives give a full accounting of their losses and in the event they don't and it's found out later they do have losses they've been hiding and not mistakes, they're criminally liable. If the government were to take that step, I think people could have confidence that the banks still around after that were in fact in solid shape.

What do you think of the stimulus compromise?

It will have some effect, though not an efficient effect. The original bill wasn't big enough and they made it smaller. By my estimate, the drop in demand is $1.3 trillion a year they're trying to replace and the latest version of the stimulus is about $350 billion a year and I'm excluding the alternative minimum tax because I don't think anyone would count a tax cut no one ever anticipated people paying out as stimulus.

What do you think we should expect from the economy with this bill in place as is?

Let's say something like the Senate version passes and we don't come up with more down the road—let's say that version passes and that’s it. I would be really surprised if we don't cross 9 percent unemployment this year and I envision it going over 10 percent next year. We're certainly going to cross 9 percent this year and 10 percent very early next year. It could be quite awhile before the economy kicks back—you have to have something to do it. We're in a situation where I suppose in a long enough time the economy will come back, but we're in such a free fall we could easily see 11 percent unemployment in 2010. But if people see the unemployment rate rising, people will also demand something be done about it and pass more stimulus. If they pass just the current Senate bill it will certainly help, but that won't prevent us from seeing a serious downturn.