It's Fantasy Economy! Some Expert Views on What Should Happen Next.

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Sunday, October 19, 2008

The current (and gaping) leadership vacuum must be filled. We need individuals who can frame the stakes of this moment for the millions -- perhaps billions -- of people who now have vital interests in a stable system of global capitalism, leaders who can explain what has happened (as FDR did so effectively in the midst of the 1933 banking panic) and lay out a way forward. Such leadership would have to be based on a new call to responsibility, personal and collective. The current crisis has been marked by an overall suspension of such responsibility -- on the part of executives who played too fast and loose with fiduciary obligations (and then took home ridiculous pay packages after destroying enormous value), on the part of households that have been buying more than they can afford for years (against better judgment) and on the part of public officials who have generally been afraid to look hard and long at what was happening in the casino of capitalism.

-- Nancy F. Koehn, historian, Harvard Business School

Experts agree that U.S. house prices still have to fall another 10 or 15 percent to bring them back to a sustainable pre-bubble level. The danger is that prices may keep falling to much lower levels, hurting the financial institutions and reducing household wealth and spending.

Stopping this very deep downward spiral of house prices requires reducing the risk that homeowners with positive equity today will have incentives to default as house prices fall toward pre-bubble levels. A program of partial mortgage-replacement loans provided by the government to homeowners who now have positive equity could do that. Taking steps to halt the overshoot of house prices may no longer be sufficient to bring recovery to the financial markets and the broader economy, but I am convinced that they are necessary.

-- Martin Feldstein, president emeritus of the National Bureau of Economic Research and economics professor at Harvard University

The necessary guiding hand of government will feel stiffer and less relaxed than we have grown used to. As they did with the Department of Homeland Security, Americans will get to know a new czar heading an Office of Financial Stability. New rules for credit, leverage and financial disclosure will usher in an era in which institutions and workers alike will feed at the hand of Uncle Sam instead of the private market, and therefore be forced to adhere to tighter regulations, forcing the downsizing of private risk positions that will be replaced with government credit.

Still, interwoven in recent policies are exit provisions that hold promise for the return -- perhaps three or four years hence -- to a safer yet still dynamic capitalistic system. We should work toward that goal, mindful of the damaging excesses of a too invisible and too exuberant free-market hand.

-- Bill Gross, founder and chief investment officer of Pacific Investment Management Company


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