Are we headed for a recession or depression? How do we fix it?
Question: What is the state of the American economy?
Thomas Cooley: In late April of 2008, I would describe the state of the economy as being quite precarious. I believe that we are going to face another several months of very slow economic growth and, you know, I think that we have many problems yet to work out in terms of the function of credit markets.
Question: Are we headed for a recession or a depression?
Thomas Cooley: Well, the talk of recession is, some sense, it's academic, so recession is defined formally as two quarters of negative economic growth and it's also defined as a slowdown that's very wide spread. It affects all sectors of the economy. So, certainly economic growth is slow, whether it formally qualifies as a recession or not is somewhat academic. Most people are feeling it, certainly it's being felt in many, many sectors of the economy. So whether it will turn out to be a severe recession, we don't know yet. Some people think it will, I don't happen to be among those. And a depression is a sustained economic slowdown, so the Great Depression of the 1930s, some people talk about the Japanese Depression of the 1990s. That's a very, very long period of sustained, low, or even negative rates of growth in the economy. I don't think that's likely at all for the U.S.
Question: Why do you consider a depression unlikely?
Thomas Cooley: I'm still a strong believer in the forces that drive the U.S. economy, which are innovation and creativity. And I believe that we are still in the midst of a process of substantial innovation, technological innovation in society, and that innovation is going to continue to drive the U.S. economy, new ideas. So I'm a big believer in that.
Question: What do we need to fix?
Thomas Cooley: Well, one thing we have to do is restore faith in credit markets and restore faith in the credit process so that once again, their liquidity can flow through the economy and find its way to financing new businesses and implementing new ideas and innovations. The recent slowdown has had everything to do with housing market, the collapse of the housing market bubble. And we have to get that out of the way. House prices probably have a ways further to fall in a lot of locations. And the impacts of that take time to work their way through the economy. So the combination of the collapse of the housing bubble and the impact that had on credit markets, the impact that that, along with all the other things that sprang from that have to work their way through the economy.