Ex-Fed Economist Looks To New Administration

Government officials have been working to restore confidence in the economy. Allan Meltzer, a former Fed economist who teaches at Carnegie Mellon University, says he has been unimpressed so far with the government's actions. Meltzer tells Steve Inskeep that he has higher hopes for President-elect Barack Obama's economic team.

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STEVE INSKEEP, host:

The bailout of financial firms won approval from Congress, but still has its critics. And that includes the man we'll hear from next. He's an economist who wants us to keep all the recent economic news in perspective. Allan Meltzer of Carnegie Mellon University wrote a history of the Federal Reserve. He is dubious of what the Fed and the Treasury Department are doing now.

When you spoke with us in September, you argued that the economy is not in "desperate straits." That's a quote. Do you still think it is OK?

Dr. ALLAN MELTZER (Professor of Political Economy, Carnegie Mellon University): I think it has problems. That's pretty obvious. But I think that there are a lot of people who are spreading doom and gloom to a greater degree than seems necessary. We're going through probably the worst of it this winter. And most forecasts say that the recession will end sometime in the summer.

INSKEEP: Does that mean that it still makes no sense to you to be spending hundreds of billions of dollars, or even now trillions of dollars, investing in banks, making loans, and doing other things?

Dr. MELTZER: I think that there's a much better thing to do. We're not going to solve the housing problem by solving the mortgage market problems. But we can solve the mortgage market problem by solving the housing problem. So throwing all this money into mortgages and credit is addressing the wrong end of the problem.

INSKEEP: Are you talking about the latest phase of the bailout where the Treasury Department says it wants to spend $800 billion to deal with the mortgage market and also to deal with the market for other kinds of credit, like credit cards?

Dr. MELTZER: Yes, I think some of that is probably a step in a good direction. What I think needs to be done most is to clean up the excess supply of housing. Until we get rid of the housing, the excess supply of housing, we're not going to see an end to the drop in housing prices.

INSKEEP: Let me ask about the way you phrase that. You said, "The excess supply of housing." Of course, you're referring to basic economics. It's supply and demand. Too many houses are for sale, so prices drop. How do you clean up, as you put it, the excess supply of housing?

Dr. MELTZER: What I want them to do is to say, look, if you buy a house this year and make a down payment - and it's important there be down payments - we'll give you a tax credit for the down payment. And if you don't pay taxes, we'll give you the money. That'll stimulate the demand for houses now and until, I would say, the end of 2009.

INSKEEP: So you feel that the government's hundreds of billions of dollars are going in the wrong place?

Dr. MELTZER: I think they're helpful, but I think that's not the efficient way to get rid of this problem. My biggest criticism of Secretary Paulson and the current Treasury is they're reactive. They're not thinking about the problem and saying, what can we do to get this problem out of the way expeditiously and at least cost?

INSKEEP: Let me ask about another thing that you told us in September, Mr. Meltzer, is you said then, if the government doesn't rush in, we'll see the market begin to solve some of these problems. You were feeling then that racing in to rescue these financial institutions was just unnecessary. Do you still think it was unnecessary, and is unnecessary, to rescue companies like Citigroup?

Dr. MELTZER: No, things got worse than I expected. So I have to admit to an error. Probably lending has been helpful, but not as helpful as what Secretary Paulson promised. We're not going to ease the credit markets by providing money to the banks. What we're going to do is to ease the bank's problem, and that's a good thing to do. But I don't believe you can solve a problem until you decide what the problem is and that you have a plan for dealing with the problem. And I don't see that happening in the Treasury. The next Treasury - I have a lot confidence in Tim Geithner, whom I know - I believe will be much more concerned with trying to get a handle on the whole problem.

INSKEEP: Allan Meltzer is author of the book "The History of the Federal Reserve," and he now teaches at Carnegie Mellon University. He's offering us an alternative view of the bailout. Thanks very much.

Dr. MELTZER: Thank you.

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