What's Wrong With the Recovery?

>> Hello, I'm joined today by Carmen Reinhardt assumed spelling, Economics Professor at the University of Maryland and the Co-Author with Harvard's Kenneth Rogoff assumed spelling of This Time is Different, a chronicle of 8 centuries where the financial panics, economic crisis' and other money disasters that have appeared with appalling regularity to wipe out people's wealth. We all know a little too much about that right now. Carmen welcome.

>> Carmen: Thank you.

>> The title of your book is ironic, actually, because there are many similarities between past financial crisis' and the one that we just went through, are still in and one of those is that every time there's a debt build-up everyone has a good excuse as to why you don't need to worry about it this time. What does that tell you about our ability to head off the next crisis?

>> Carmen: Ah, the next crisis, well the next crisis will probably not be here, it will be somewhere in another part of the world where they will say no, that happens in the United States, but not here. I think what history tells us is that for a while our memory of this crisis will be alive and will make us more prudent towards debt and towards saving and so on, but then we forget.

>> Inevitably we forget.

>> Carmen: We forget.

>> Where do you think we are in the recovery based on your research into the past?

>> Carmen: Ken and I have chronicled the major financial crisis' and for the post war period we would be right on the mark around the bottom or just having seen the bottom. That's the good news.

>> What's the bad news?

>> Carmen: The bad news is that crisis' do take a while even those that recover with strength and vibrance. Take a while to get us back to where we were. Meaning the -- from where we are to recovering the income level where we were before the crisis is about 2 years.

>> 2 years, I thought you were gonna say 7 that's actually better than I thought.

>> Carmen: But, but here's the worst news, this is a global crisis and that is one of the concerns I have about the magnitude of the recovery. Other post war crisis' exports were very helpful in pulling the economy out of recession but that was because the crisis' wasn't synchronized the way this one is.

>> I see, there are some people who are worried that we may be building another asset bubble considering how fast stocks have recovered, considering the growth and commodities prices, what do you think?

>> Carmen: Well, commodity prices are -- Ken and I have put together data since the 1700's for commodity prices and they're a rollercoaster. Have always been a rollercoaster so this is not any different. I think if one wants to consider bubbles building the fueling mechanism, which is credit, is still not working in our economy right now. I think it's possible to talk about the market getting ahead of itself especially if the recovery's disappointing. But, as I said, I think the next bubble will be somewhat inaudible.

>> What scares you most about the economy now?

>> Carmen: Right now I would say that they are two types of concern; one has to deal with the fact that this crisis is global. We hadn't seen a global crisis such as this since the 30's. And one looks at these experiences of other crisis' and it turns out that exports are a big engine of growth and we're not going to be helped on that score, so that's one source of concern. The other source of concern is, which also feeds into a more anemic recovery, one that doesn't bring employment down very -- unemployment down very quickly, is that we are being very Japanese in terms of how we're handling the nonperforming assets of banks.

>> We're afraid to bite the bullet and treat those loans as truly toxic.

>> Carmen: That's precisely what I'm getting to. And delay is very costly.

>> Well, that's not so reassuring. Now, tell me if you're an ordinary investor what can you do to keep yourself apart from the next financial crisis to jump off the train as it were before it goes over the cliff?

>> Carmen: Never listen to someone who tells you that this time is different. I think in our current conjuncture I think we have to look with some scrutiny at government debt. Treasury debt is taken as the riskless assumed spelling asset, universal riskless asset and as the debt piles up what we have seen in the past is countries that issue a lot of debt ultimately wind up with some down-grades. Some of them wind up even with higher inflation or in the worst case both. And that is something that we have to be very careful that these deficits and debts do have longer term consequences.

>> It's certainly a disorienting experience to think about the treasury bonds as being a potential for down-grades but I guess that's something we have to face now. Carmen, thank you very much for being here.

>> Carmen: Thank you for having me.

>> And thank you for watching.

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==== Transcribed by Automatic Sync Technologies ====