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Tepper Economists Weigh In On Global Problems

alumni economics panel story image.jpgThree renowned economists at the Tepper School of Business gave their insights into pressing global economic problems dominating headlines.

Marvin Goodfriend, professor of economics and chairman of The Gailliot Center for Public Policy, expressed concern that prominent voices in the government, media and academia are advocating inflation as a way to fight high unemployment – advice he believes would backfire.

The Federal Reserve made low inflation a priority as never before after it ended two decades of instability associated with high and variable inflation in 1985. Now some want to risk, tolerate, or target higher inflation in an effort to bring down the unemployment rate. These “inflationists” as Goodfriend calls them, would have the Federal Reserve stimulate the economy by printing more money and expanding its balance sheet, by extending the maturity of the securities that it buys, and by acquiring more mortgage-backed securities.

But Goodfriend warned, even if aggressive Fed initiatives pushed current unemployment lower, rising inflation would lead to higher average unemployment in the longer run. “We don’t want to go back to the bad old days of high inflation,” he said during the panel discussion in front of alumni at the Rivers Club in November. “I hope the Fed resists the ‘inflationist’ temptation.”

Chester Spatt, the Pamela R. and Kenneth B. Dunn Professor of Finance, discussed how governments sometimes make their financial situations worse by dismissing independent evaluations of their creditworthiness or by trying to manipulate credit markets.

For example, Spatt said, that just 48 hours after Standard & Poor’s downgraded the U.S. credit rating in August, U.S. Treasury Secretary Timothy Geithner complained about the credit rating agency’s “really terrible judgment.” Spatt credited Geithner for pointing out that S&P had made a $2 trillion arithmetic error, but he said that the “fundamental arrogance” of being dismissive of an independent evaluator was "striking."

The U.S. government isn’t alone in dismissing credit ratings it doesn't like, Spatt said. The Italian government was so displeased by a credit rating that it ordered a police raid on a rating agency.

Spatt, who served as chief economist for the Securities and Exchange Commission from 2004 to 2007, also criticized the recent decision of some European government’s to ban “naked credit default swaps,” which allow traders to bet on a country’s potential default, as well as the efforts in restructuring Greek debt to create a “voluntary” event and avoid triggering a credit event under outstanding credit default swap contracts. Also shortsighted, he said, is the European Central Bank’s decision to buy government bonds in an attempt to stabilize the prices of the sovereign bonds. “It discourages rational private investors from investing in the market,” he said.

For his presentation, Chris Telmer, associate professor of financial economics, gave an analysis of whether the European crisis is a crisis for the Euro.

Conventional wisdom in the media has it that at the heart of the European crisis lies the Euro and that the individual countries have woken up to the fact that the monetary union was a really bad idea after all, he said. “The typical argument is that Europe is far too large to have a common currency and that a one-size-fits-all monetary policy won’t work for such a diverse area,” Telmer said.

But Telmer said that there is scant empirical evidence to back these arguments up. Instead he pointed to the only explanation that makes economic sense to him -- that monetary union has left Europe without a lender-of-last-resort that can provide liquidity to solvent governments. “That is the big elephant in the room. In Europe, there is a lender of last resort for banks but not for governments. That is the flaw. It can lead to a rational run on government debt.” 

"The monetary system is a sideshow. This is a crisis of government debt and fiscal policy. Deeper still, it is a crisis of federalism. Any viable federation must have a mechanism to make transfers from strong members to weak members. At the same time there must be fiscal discipline to ensure that such a mechanism doesn't lead to irresponsible behavior."
 


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Marvin Goodfriend

Chester Spatt

Chris Telmer

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