Q&A with Ed Rice

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Q&A with Ed Rice

Ed Rice is a Professor of Finance and Business Economics at the Foster School of Business, University of Washington

KCTS 9: Are the banks at fault for our economic situation?

ER: People say to the banks, you did a lousy job, you loaned money to a lot of bad credit risks. And the banks say, okay we won’t loan money to a lot of bad credit risks. And then what happens? People say, you’re not lending enough money. And the banks say, well, we don’t see a lot of good credit risk out there and there’s a lot of uncertainty in the economy we shouldn’t be loaning a lot of money.

So I think there’s confusion …a lot of this is, the banks have to get on a healthy footing so people trust the banking system, once people trust the banking system and there’s a little more predictability in the economy, then things that look like now to be bad credit risk will turn into better credit risk and I think lending will start to expand to some extent.

KCTS 9: Should we be bailing out the banks?

ER: The key thing is, does this industry have important effects on the rest of the economy? Now all industries have some effect on the rest of the economy but the banking system is kind of the blood that runs through the entire economy’s veins.

It effects every single sector of the economy. It’s what directs the capital that gets everything produced and going. And so, even though to some extended the banking system has screwed up and the financial industry has certainly made mistakes. The cost of not having a vital financial industry is enormous for everybody else.

KCTS 9: What happens after the stimulus plan?

ER: My greatest fear is that when get out of this situation there’s going to be too much reliance on government. I think people have a feeling things have gone wrong when thing go wrong there’ s generally a feeling, I want to be safe and the thing that makes people feel safe is government and so my worry is that there’s going to be too much government control of the economy.

I think this is something that people in the administration worry about as well but there’s a large demand for a kind of government takeover implicitly or explicitly of sectors of the economy that maybe make you feel good right now. But when this is over it’s very difficult to unravel that government control and I’m concerned that we are going to have too much of that government control and have to do some serious unraveling.

KCTS 9: Could we be facing another depression?

ER: I think we’ve learned some things… since the depression. My guess is, it’s not going to take, y’know 10 years to get out of this. I think there are lot of things going on in the world that make it, make information more freely flowing, the things we’ve learned over the years, the fact Ben Bernanke whose, … one of the, one of the leading students of the great depression, is head of the Federal Reserve suggest that we’ll figure something out to, to not go, not not be as bad as the great depression was.

KCTS 9: Could the American government be facing a bankruptcy?

ER: The Argentina and Iceland situation was because the governments there made promises in, basically in… in terms of things they don’t control. Now almost all the obligations to the US government is in terms of dollars. And one of the great things about government, that you or I can’t do is, they can print their own money. So if they say, we will pay you a thousand dollars. They can make a thousand dollars and pay you. Now what that thousand dollars is going to be worth, that’s a different question but they certainly can meet the obligation.

So I don’t think they ‘re going to be in quite the same kind of problem that these other governments are in. But I think the question is, how much Dollars are going to be worth and that’s kind of an inflation question. I think there, there are, y’know part of the danger of these stimulus packages is there’s a lot of money that’s going out there. Right now, the velocity of money is very low which means it’s unlikely to create any short-term inflation but in the long-term all the money that’s being created could potentially turn into an inflationary…rapid inflationary scenario which would be very bad in the long-term.