By Joseph E. Stiglitz, R. Glenn Hubbard and Myron S. Scholes (THE NEW YORK TIMES, 07/10/08):
John McCain and Barack Obama will meet tonight in Nashville for the second presidential debate. As Americans worry about a confusing federal rescue plan, a falling stock market and a financial crisis that is spreading across the globe, the editors of the Op-Ed page asked three economists to suggest the questions they would most like to hear the candidates answer.
1. When the current bailout of Wall Street fails to turn around the economy and reinvigorate credit markets, will you propose another one? How large should it be? Henry Paulson and Ben Bernanke have said what is needed is a restoration of confidence in the economy. But won’t the failure of this bailout destroy confidence, with disastrous consequences — as happened in Indonesia and other East Asian countries when similar bailouts failed 10 years ago?
2. More than a million people have lost their homes in the past two years. A million more are expected to lose their homes in the next 12 months or so. Do you support a more direct program of relief for homeowners? The government pays more of the mortgage costs of rich homeowners, through larger tax deductions, than of poorer homeowners. What would you do to correct this injustice?
3. President Bush pushed tougher bankruptcy laws that were supposed to reduce bankruptcy and lower lending costs. But the new laws made it more difficult for ordinary Americans to discharge their debts, and encouraged reckless lending on the part of lenders, who thought they could more easily force poor borrowers to repay. Would you make any changes in the bankruptcy laws? Currently, it is more difficult to restructure a mortgage on a primary residence than other debts. Do you support bankruptcy reforms that would make it easier for people to stay in their homes?
— Joseph E. Stiglitz, a professor of economics at Columbia who shared the Nobel prize in economics in 2001 and who has advised the Obama campaign.
1. Does the financial crisis indicate that we need more regulation? Or is the problem less one of too little regulation than of poorly focused regulation? The crisis had its origins in part in international capital flows that led to extraordinarily low interest rates. But high-risk mortgage lending drew some of its breath from regulatory interventions. Some heavily regulated financial institutions managed to get themselves in trouble. And it was government-sponsored enterprises, no strangers to regulation, that stimulated the demand for questionable mortgage products. Shouldn’t the next president be standing up to protect markets instead of sowing doubts about them?
2. The Federal Reserve has had to step into the political fray to an uncomfortable degree. Are we asking too much of the Fed? Should we create a strong financial regulator that would stand shoulder to shoulder with the Fed?
3. The existing capital standards for financial companies helped create the illusion that risky assets were “safe.” A reformed system could mandate more capital, to support incremental risk-taking, during a boom and lower such capital requirements in a bust. By changing capital cushions over credit cycles, banks would be less likely to be forced into asset fire sales. Would you support such a change?
4. Do you support the appointment of a presidential commission to report quickly on the causes of the current crisis and present options for regulatory reform?
— R. Glenn Hubbard, the dean of Columbia Business School and the chairman of the Council of Economic Advisers from 2001 to 2003.
1. Discuss the tradeoffs for our economy, if any, between growth (so-called trickle down) and redistribution (so-called sprinkle around) policies.
2. At this moment, there seems to be an overwhelming cry for retribution, in the form of new regulations aimed at our financial services industry (so-called Wall Street). To what extent do you believe that these measures are necessary? How will you judge the benefits and costs of the choices to be made? How will the new regulations take into account the evolution of the financial services sector in trading securities or goods and services, financing businesses and homes, saving for college or retirement, and reducing and transferring risk?
3. Individual innovation and creativity in our society are the cornerstones of our economy. They create wealth and improve the nation’s welfare. Through innovations, the 20th century became the American Century. Will the 21st century be so as well or will it become the Global Century? How, if at all, would your administration foster innovation in the following areas: the provision of health care for our citizens; an immigration policy that attracts and retains the best; educational policies that increase the value of our human capital, our most important resource; helping people accumulate enough retirement savings; international trade and manufacturing; the evolution of information technology, biotechnology, nanotechnology and neuroscience; the allocation of water, food and energy and the development of alternative energy sources; and, to some, the most important, the environment?
— Myron S. Scholes, who shared the Nobel prize in economics in 1997.