Cecil Bohanon has been a professor of economics at Ball State University for more than 25 years. He gives insight into the state of the economy after the events of the last two weeks.
Daily News: Put this economic situation in context historically.Cecil Bohanon: In terms of the real economy, goods and services being traded, people getting jobs, folks going to the grocery store and buying things, nothing's really happened yet. There's not 'yes, we've been in an economic slope'. Gross domestic product (GDP) hasn't turned negative; the unemployment rate is 6.1 percent, that hasn't seemed to be affected yet. What you have seen is a major financial crisis on Wall Street that has created a response that is unprecedented. The thing that is unprecedented and that we haven't seen before are the kind of regulatory changes and response that have come because of all this.
DN: What is the $700 billion bailout all about?CB: The idea is that much of the financial crisis stems back to the following: A lot of very poor decisions were made about granting mortgages. People choose to take mortgages that they really couldn't afford on terms that weren't viable. ...The logic of it is it allows government to raise its debt limit by $700 billion to buy out these "toxic" mortgage entities. I understand the idea of it. It is very straightforward. They are going to try it like a leech to suck out the poison in the body economy, that's what the federal government wants to do.
DN: What are the thoughts on Wall Street about this?CB: That's really interesting because it seems to me that there are all kinds of different positions and they don't cleanly follow any ideological perspectives, per se. What I do find interesting is that the Jonah Goldbergs, the Mike Pences, the people who are part of the free market right are raising objections to this. It's also interesting that with The Nation magazine and other people on the left that those two sides are agreeing with each other.
DN: Why is this a worldwide problem?CB: Financial markets are interdependent in a way they never have been before. If AIG is writing insurance policies around the world and people in Hong Kong who have insurance policies with AIG are going to be very upset if AIG goes under. That's part of the problem. Interest rates are all interconnected.
DN: I've heard that when this is over we'll have more than $11 trillion dollars worth of national debt. What effect does that have on my generation?CB: When the government runs in a deficit they go out and borrow. When they go out and borrow that has some effect on what overall interest rates are. That means resources are going to the public sector and not the private sector. The second thing is that the majority of the debt is held by Americans. So yes, people in your generation have to pay off the debt, but your grandparents own the debt, so you inherit that. That's basically a wash.Eleven trillion dollars seems huge, but realize the size of the American economy is about $14-15 trillion. If you look at the debt as a fraction of the GDP, it's not out of line with other countries.
DN: At what point do we need to be scared?CB: That's a very good question. Part of it has to do with your long run view of our economy. There's going to be differences of opinion about that. Some people I think are going to welcome this and say this should lead to more government regulations and that it will be good. Others are going to say, "No I really don't like this at all." ...When should you get scared about the economy actually going into a depression? It's when there's a line at Merchants Bank of people trying to get their cash and they can't get it. But, we're not anywhere near that.
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