"Experts Sound Calls for Action on Economy"

Newsletter Article, Belfer Center Newsletter, Belfer Center for Science and International Affairs

Summer 2008

With the United States economy still in turmoil, economists affiliated with the Belfer Center are deeply involved in helping the federal government develop sound policies to mitigate the damage.

Martin Feldstein, Harvard economics professor and member of the Belfer Center Board of Directors, is outgoing president of the National Bureau of Economic Research, the organization that is officially charged with declaring a recession. Feldstein expressed his personal opinion on the matter in a speech in March, saying that the United States is in a recession that could be “substantially more severe” than those in the recent past.  “The situation is bad, the situation is getting worse, and the risks are that it could get very bad,” Feldstein said.

Feldstein has called for action by both Congress and the Federal Reserve to stimulate the economy. Additionally, in a Wall Street Journal oped on March 7 titled “How to Stop the Mortgage Crisis,” Feldstein noted that the housing-related risk is greater than anything since the 1930s. He called for a program of federal loans to individuals to pay down part of their mortgages, secured by their future incomes.

One way such a program might work, Feldstein said, would be for the federal government to lend each participant 20 percent of that individual's current mortgage at a very low interest rate.  She/he would pay it back in 15 years.  In the meantime, the individual would immediately pay down his existing primary mortgage, substantially reducing interest and principal payments.  This would have the effect of also reducing the possibility that the individual would have a negative equity mortgage.  In doing this, it would lower the risk of more widespread defaults that would push house prices down even further.

Lawrence Summers, Charles W. Eliot University Professor at Harvard and a member of the Center’s board, has called for the government to seriously examine ways to help refinance mortgages that consumers can no longer afford. “If the government, by stepping in and engaging in transactions where it could well make a profit, can contribute importantly to that, that's a very worthwhile effort for the government to engage in,” Summers said in March.

Summers also has advocated more credit counseling and increased aid to state and local governments that have been hit hard by the economic crisis.

Paul Volcker, former chairman of the Federal Reserve and a member of the Belfer Center International Council, has suggested a broader role for Fannie Mae and Freddie Mac in mitigating the crisis, as well as tighter government oversight of investment banks such as Bear Stearns. The U.S. government stepped in to assist JP Morgan in taking over Bear Stearns in March, raising new questions about the role of the government in shepherding the country through the crisis.

“Unless the Fed’s initiative can somehow be contained to a single aberrant incident—which seems quite unlikely—a direct responsibility for oversight and regulation follows,” Volcker said at the Economic Club of New York in April.

Jeffrey Frankel, James W. Harpel Professor of Capital Formation and Growth and a faculty affiliate of the Belfer Center, argues that the euro could surpass the dollar within 10 years as the leading international currency. Frankel explains that this matters both for economic reasons—“the U.S. would lose the ‘exorbitant privilege’ of being able to finance its international deficits easily”—and geopolitically.

“In the past, U.S. deficits have been manageable because allies have been willing to pay a financial price to support American global leadership; they correctly have seen it to be in their interests,” Frankel wrote on his blog in March. The next time the U.S. needs other central banks to bail out the dollar, Frankel said, they may not do it as willingly.

For more information about this publication please contact the Belfer Center Communications Office at 617-495-9858.

For Academic Citation:
Communications Office. "Experts Sound Calls for Action on Economy." Cambridge, Mass.: Belfer Center for Science and International Affairs Belfer Center Newsletter (Summer 2008).