Anchor: I will now introduce you to this evening’s guest, Stanford Professor Emeritus Daniel Okimoto. Welcome, Mr. Okimoto.
Anchor: Welcome to our studio, thank you for coming. I did an interview with you last year last time, maybe last November, but did you anticipate that the situation would be this bad?
Okimoto: No. I knew that it would be a very serious situation, but I didn’t forecast the full scope and severity of this financial crisis and economic recession.
Anchor: How do you see the current situation for the US?
Okimoto: Well, the US financial situation is still serious. We avoided, thanks to the efforts of the Federal Reserve Bank (FRB) and Ben Bernanke, the worst scenario, which was a collapse of our financial system. But credit is still very tight, and the financial crisis has now given rise to an economic recession. The seriousness of this recession will have to be dealt with over the next year, or even two or three years. The end is nowhere in sight.
Anchor: As for the banking system, as you mentioned, the Federal Reserve did a lot of things, but we have not seen the effects. Why is that?
Okimoto: : The Fed’s quick and bold actions worked in the sense that they prevented a collapse of the US and global financial system. If the financial system had collapsed, let’s say AIG had gone bankrupt after Lehman Brothers, then surely we would have had a catastrophe on our hands. But luckily, we avoided that nightmare scenario. However, because of the severity of the financial problems triggered by the subprime mortgage crisis, we still have many things that remain to be done even in the financial sector. Many investment banks, hedge funds, insurance companies, are still heavily levered; they have borrowed a massive amount of money, and the value of their debt is spiraling downward as each day passes. So the health of these financial institutions in the United States and around the world remains grave.
Kanise: Professor Okimoto, in terms of priorities, what would be the first thing the US government must do?
Okimoto: One of the first things that the US government should do is provide a fiscal stimulus for the economy, because consumer spending is declining steadily. Consumer spending, as you know, is 71% of the American GDP, and this 71% is shrinking, I think, steadily—down to 67%, maybe even 65% over the next year or two. That means that more than 500 billion – 600 billion dollars of demand will disappear from the US economy. As consumers spend less, businesses will earn less, and they will invest less.
Kanise: A so-called vicious cycle.
Okimoto: Yes. Government spending is the only way to fill this loss in aggregate demand.
Kanise: But America is deeply in debt!
Okimoto: I don’t think that Americans understand the true dimensions of the cumulative national debt. Since 1957, the American government, businesses, households, if you add them all together, have collectively amassed a debt, at the end of 2007, of 53 trillion dollars. 53 trillion! That is 375x larger than the US GDP. Every American is heavily in debt already, so if you add more debt through a fiscal stimulus, and the Federal Reserve pumps more money into the economy, the American debt will skyrocket. However, if you don’t do this, we could have a depression, and the overall costs of a depression will be far greater than the cost of the fiscal stimulus and spurt in money supply. You have to look at the prospect of another possible Great Depression and say, “We need to look beyond this crisis. We need to act NOW—and do so immediately and boldly.” For the time being, let’s not worry about the soaring debt. Because if we don’t do anything now, the crisis will only worsen, and people will suffer—including a loss of jobs, a loss of disposable income, a loss of homes for many, and a loss of value in retirement savings and investments. The situation will turn dire.
Anchor: I understand that the spending, the public policy spending will cause a higher interest rate. Won’t this cause depreciation of the dollar?
Okimoto: Absolutely. In the long run, if you borrow that much money, sooner or later the dollar will weaken in value. Indeed, one way of dealing with America’s crushing debt is to inflate our way out of it. Right now, China and Japan are buying the lion’s share of US treasuries. They buy together more than 50% of our treasury bills. And China has lost, by my estimation, since 1999, over 300 billion dollars in the value of their dollar reserves because the renminbi has strengthened relative to the dollar and the interest rate in China has been higher than in the United States. Thus, it’s possible that China will look at this situation and decide that it doesn’t want to continue buying US treasuries at the same rate as in the past. If that happens, the cost of capital in the United States will rise.
Anchor: Now, let’s talk about what the long-awaited president-elect Obama is capable of.
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”Obama: I think the most important thing to recognize is that we have a consensus, which is pretty rare, between conservative economists and liberal economists, that we need a big stimulus package that will jolt the economy back into shape, and that is focused on the 2.5 million jobs that I intend to create during the first part of my administration.”
Anchor: Doctor, how do you see him, and how do you evaluate his words?
Okimoto: President-elect Obama is coming into the worst—most intractable situation—of any US President since Franklin Roosevelt in 1932. As you know, Franklin Roosevelt was elected president in the midst of the Great Depression. Before Franklin Roosevelt, Abraham Lincoln stepped into office just before the Civil War, which threatened to split the country into two separate nation-states. Lincoln, Roosevelt, and now Obama: these American Presidents have inherited an awesome, onerous burden of responsibility. I think Obama is the right person to lead the country at this difficult time. Why? Because he has won an overwhelming electoral victory in the election, which has given him a public mandate—widespread support from the American people to tackle knotty problems and to pursue bold policies that will revitalize the economy and restore the greatness of the country. I believe that he is capable of meeting the challenge—though the chances of failure are substantial. One early, encouraging sign is evident in the quality of the cabinet that he is now assembling. It is experienced, it is capable, and it is energetic and bold. His economic team and his foreign policy team ought to be strong.
Kanise: Whom would you like to have been chosen for Obama’s economic policy team? For example, Lawrence Summers, the former Secretary of the Treasury?
Okimoto: Although he may stir up controversy, Larry Summers is a brilliant economist. I think he will be a key person on Obama’s economic team because of his experience as former Secretary of Treasury and owing to his superb grasp of macroeconomics. And then Paul Volker, the former Federal Reserve chairman, and Timothy Geithner, former head of the New York Federal Reserve: Yes, this is a formidable team. It had better be, because the sheer magnitude of the financial crisis and the economic tailspin will require effective policy solutions from the finest possible team of economic advisors.
Anchor: I want to ask something. How will Japan benefit from Obama’s policy?
Okimoto: First of all, Japan will be affected by whether America is stable, whether it is prosperous, and whether it can maintain peace and stability. In that sense, a major burden of leadership responsibility for US-Japan relations will fall upon President Obama’s shoulders. If he is able to revitalize the economy and steer the world through this dangerous crisis, it will redound, in untold ways, to the benefit to the United States and Japan. Barack Obama said yesterday that one of the key objectives for his administration will be to consolidate America’s relationship with its historic allies. Of course among America’s allies, Japan is among the most important—if not THE most important. I think that President Obama will place a lot of emphasis on US-Japan relations and more broadly, on American relations with Asia. Hence, I expect positive policies towards Asia, even though he hasn’t had a lot of experience with Asia himself. Still, he’s the first American president who has actually lived in Asia. He spent several years as a youngster in Indonesia!
Kanise: Oh yes, that’s right. So he has some sort of affinity to this area.
Okimoto: Yes, and he has lived in Hawaii. Even his name sounds Japanese. Obama-san.
Anchor: As you know, Japan’s politics is not that stable. So how and what should Japan do to forge a new partnership?
Okimoto: I would say that Japan should establish a strategic partnership with the United States and the area that I think is the most logical is clean technology and the environment. Japan has leading-edge technology in this area. Japan has the potential to assume a leadership role. Many American leaders, including President Obama believe that clean technology is the next engine of growth to drive global growth—just like IT, the main driver of productivity gains and economic growth in the 1980s and the 1990s.
Kanise: To make that happen, we need strong leadership, which we lack right now.
Okimoto: I have a hope that sooner or later Japan’s political situation will be strengthened and that Japan’s political leadership will deal more effectively with the problems of its aging population and shrinking labor market.
Kanise and Anchor: I hope so, too.
Okimoto: Japan’s economy appears to be sliding relentlessly back into recession—similar in some respects to the late 1990s. This makes it ever more important that Japan and the United States find ways of working cooperatively to solve the world’s economic woes. My hope is that clean technology and preserving the global environment will be an area where the two countries can join together to lead the world. If so, it would be a contribution of monumental importance, benefiting the rest of the world and several succeeding generations.
Anchor: Thank you so much.