MIT Experts Weigh In on Economic Woes

With a long recession looming, the government is enacting drastic measures to curb the recent financial problems, but when will things improve? Is Congress doing enough? Can Congress even solve the problem now?

From a frozen credit market to major financial firms declaring bankruptcy, there are many ways Americans can be hurt by the financial crisis. The unemployment rate (currently about 6 percent) is likely to rise as more Americans lose jobs while credit will remain hard to come by during the recession that is likely to follow.

Before the economy gets better, it’ll probably get worse, said Andrew Lo of the MIT Sloan School of Management. “In the short term, more banks and businesses might close,” said Lo.

Students will also be hit by the crisis; Lo said that they would most likely find it harder to secure jobs after graduation.

Ricardo Caballero of the MIT Economics Department said that although student loans will be negatively affected, the effect would die down soon. But, he said, university endowments are sure to be hurt.

According Caballero, before any strong recovery can occur, the government must become more flexible. An “economic come-back is all politics at this point,” he said. The government failed to respond until the downturn began, Caballero said.

The crisis, however, likely could have been averted if regulators acted sooner. “It’s understandable why there was a crisis. For a period of several years of very low interest rates allowed for easy money,” said Lo. For years, people effortlessly borrowed money and the economy boomed. “There was a housing market that would never go down and strong market trends. Now people are paying the price,” explained Lo.

Lo said that careful attention must be paid to proposed governmental plans. “To avoid another crisis,” Lo said, “we have to deal with lessening the number of foreclosures and helping banks that still have value to get back on their feet.”

To preserve long-term economic stability, Lo recommends better insurance measures and the development of rescue packages.

In an economy panel on Oct. 8, William Wheaton, a professor of economics at MIT, explained that instead of trying to keep people in their homes, stable house prices should be achieved.

But despite slim prospects, plans are in motion to alleviate the stress on the economy. The government is now instituting multiple plans to infuse into the economy, including the hotly debated $700 billion “bailout” plan.

As part of the bailout plan, the Treasury Department has outlined five steps that will supposedly mediate the crisis. In a press release, top Treasury Official Neel Kashkari described these measures as purchasing equity in a range of financial institutions, buying troubled mortgage-backed securities, purchasing mortgages from banks, insuring assets so that banks don’t lose money in case borrowers are unable to pay, and exhausting every possible means to keep borrowers that default in their homes.

With the plan in place, Caballero said that in the best-case scenario, there will only be around 3 to 4 more quarters of financial difficulty.

Lo said that three years of recession probably lie ahead.

“The natural reaction is to panic, but there is hope at the end,” said Caballero.