The financial outlook began to look a bit more optimistic in September, as some economic indicators, such as the DOW Jones Industrial Average and the prices of physical assets, showed signs of recovery one year after the outbreak of the financial tsunami triggered by the bankruptcy of Lehman Brothers. But does the numeric recovery really count? More importantly, is it time for the rescue programs to cease? Wang Jiang, Chair Professor at Sloan School of Management of Massachusetts Institute of Technology, offered his insights in an interview with the Shanghai-based 21st Century Business Herald. Edited excerpts follow:
Currently, asset prices have seen a substantial increase, especially those that greatly plunged during the financial crisis, like real estate, credit products, gold, gas and industrial materials. For those assets, as of now, the price increases have not been able to fully cover the losses witnessed in the past year, and it will be difficult to predict whether or not they will be able to fully recover in the future.
Gold, on the other hand, went through a different price change than the other assets, as soaring gold prices reflected inflationary expectations.
From my point of view, the inflation is not nearly as serious as was anticipated. Total liquidity growth has been high, but luckily it did not lead to actual inflation. We did not see high inflation through inflation indexes, because uncertainties remain in real economic revival. Household consumption in the United States shrank while savings increased, which did not leave much space for price increases. Under these circumstances, the government is able to maintain high levels of liquidity.
But to be completely honest, I don't fully agree with the rescue plan of the U.S. Government. To some extent, the government's support for banks went too far. Banks need to assume responsibility for their behavior; otherwise they will do more harm to the stability of the whole financial system.
When financial institutions, like Citibank, were in trouble, the U.S. Government was forced to keep them afloat simply because they were too large to let sink. The government lent money to those banks, but the despair did not die out. The non-performing assets are still there.
When the financial crisis first broke out, the U.S. Government did not hesitate in saving the banks because they worried about more serious problems if no actions were taken at all. I don't think we should exaggerate the possibility of an economic depression. But I also understand the government's overreaction while faced with that situation.
Now, some governments are considering if they should withdraw their rescue plans or not. The situation is the same now as it was at the outbreak of the financial crisis. If they withdraw now, what should we do when the economy fluctuates later? The U.S. unemployment rate is still increasing and will remain high for a much longer period of time than anticipated. We still don't know whether the government's efforts in lowering the unemployment rate will pay off.
If the unemployment rate increases after the withdrawal of the bailout plan, the public shall have enough reason to further criticize the government. For economic policymakers, it will be a difficult choice to make.