Assessing the economy

[0:00]" So just how bad is the economic crisis facing this country and just how long is that likely to last and what's the best way. For the country to extricate itself from. Joining us this morning is Harvard professor Kenneth robo formerly the chief economist at the International Monetary Fund and he. And a colleague have written a fascinating Op Ed piece in The Wall Street Journal this week. That explains what crises in other countries including the notorious one in Japan in the 1990s can teaches about what America faces. Professor thanks let's start with at what -- Japan do wrong and we want to avoid doing."

[0:37]" Well I think the main thing Japan did wrong as they lifted denial for a long time they never got out of the crisis. So date used fiscal stimulus what we're doing but they never really cleaned up the banks. They never really used monetary policy aggressively. Really just never faced up to the magnitude and severity of the crisis. To some extent. We've been behind the curve a Tian -- again and and it had an under power response. And it's also made it harder for the political system. To get it had -- wrapped around the problem because -- treasury in the -- Serbs for so long at least. Under bush and Paulson. We're just two --"

[3:39]" Let's talk about the bank crisis the credit crisis. What is your view of first of all the TARP. And whether the government should completely restructure what's left to the final -- or should if there's to be a supplement to that. Should it come up with -- more accountability should set up an aggregate bank to take up toxic assets we thank."

[4:01]" Well a lot of complicated questions I think part of the problem as the -- is so would be. That it's hard to know what direction to go. I think economists have a pretty clear idea in theory of what ought to be done which is there's a very big hole in the banking system. They've just they had lost a lot of money on mortgages but also the economies that deep recession. So garden variety loans like credit cards auto loans and other things also running into trouble and the banks are losing money. They're losing so much money that there are afraid to land any money. And what really needs to be done is that they need to give honest assessments. What they've got on the fox. And then they need to be what we call recapitalize. Given enough money so they feel comfortable making loans again. But the big debate swirling -- how do you do that -- all taxpayer money. Where should summon the bondholders people who lent money in the bank should -- I think most people would it pretty obviously the latter. But after what happened at September land Lehman brothers' the big investment bank was allowed -- The government's gotten cold -- So we all -- that the Obama administration was going to announce something I'm Dave winer paid two or day three. And the clock is ticking and they haven't done so yet. I think partly because it's so complicated I'm optimistic that they're going to do something very soon. Solid strong plant even if it's not -- about one beats what we have now and it had the last six to eight months which is no plan."

[5:42]" would you like to see some banks if it necessary to go."

[5:46]" Bankrupt. Well I mean in NATO not to use euphemism for a but I mean I think a lot of the banking -- stand this nest but there you know going to have to be. Have their books restructure so I think equity holders will have to be wiped out for some banks and management will have to be replaced. And in some cases people who -- money to banks that want to be really clear I don't mean depositors. They're ordinary depositors -- an anticipated fall. But more you know big time Landers to these guys probably. Should pay -- And shut out that there are a lot of very -- well run smaller banks in the New England area that are really quite sound and making money. It's really that -- so called money center banks that are the cause of the problems."

[6:35]" Yeah and as so you -- get back to it which he said immediately obviously the equity side people who own stock in banks have already taken a hit. Which are suggesting is that the people who bought bonds who and gave loans to the banks should this step up to the plate before the ordinary taxpayer does."

[6:51]" Absolutely I mean that's what happens in the case of most companies that the equity holders to of people. Stockholders that goes to zero but if that's not enough people who lack money that the company don't get a call back. That's why when -- loan to most companies. Even really big once you get paid more and after landing to the US government considers this rest. That it might not pay and our system really revolves around you know having. Matter having the government not bail everyone out all the time and it sent the financial system has black male running the country and hanged. You know saying that we go down your dog going down without and I think the government has to find some way to balance that. Not to do to be hyper aggressive but not necessarily to do it all with taxpayer dollars. This is not easy though which is wild the Obama team has just great people on the economic side. There -- having trouble reaching a clear and --"

[7:52]" get back a professor to the the whole business of how long mrs. lasted and what we're going to get out of it and you've done. Some historical comparison and and have some. You know substandard paradigms as to what to look foreign and how long. These downturn should last -- based on those where are we in the cycle and then when we was -- going to be one happy family."

[9:21]" So -- not out of this by along shot and if you could draw a comparison to our earlier history. In the Great Depression some critics say bed what the FDR did inspiration to protectionism that was was approved at the time. Made the crisis even worse than it it that it would've been defeated been allowed to run its course by itself."

[9:41]" Well it certainly second the protectionist -- means so I'm very concerned about these by American clause does sort of slipped and some of the bills. The trouble is that we do it everybody else does and we're really an economy that depends on trade. It's a very tricky problem to handle and Roosevelt. Back in the thirties. Did some things that were parades and did some things with the benefit of hindsight weren't. Hopefully we can benefit from that experience."

[10:50]" He's professor of economics at Harvard university and former chief economist of the IMF. Kenneth -- professor thanks so much we'll talk again."