Economist: We haven't seen a situation like this since WWII

Massachusetts Institute of Technology professor Peter Diamond prepares to address the media after winning the 2010 Nobel economics prize on October 11, 2010 in Cambridge, Mass.

Jeremy Hobson: President Obama officially sends his $450 billion dollar jobs plan to Capitol Hill today, and he'll be bouncing around the country
this week putting pressure on Congress to pass it.

We're going to talk now about the big picture with a guy who won a Nobel Prize last year for research on the job market. Peter Diamond is an economist at MIT and he's with us now from Lexington, Mass. Good morning.

Peter Diamond: Good morning.

Hobson: Well when you look at what we're in right now, do you have comfort in the fact that perhaps we've been in a situation like this before? Or do you feel like this is so new, it's very different than anything we've been in before?

Diamond: It's certainly very different from what we've seen since World War II. This is different because we have had both the housing bubble and bursts, and we've had a banking crisis so that a lot of the banks are weak. These are phenomena that we have not seen on this scale since the '30s. And also, we're now facing the question of whether the sovereign default risk from Europe will impact us -- both through exports going down, and from some possible impacts on asset values for the financial system.

Hobson: Well, you mention housing -- I mean, can we get out of this whatever it is that we're in without fixing the housing market?

Diamond: Eventually yes. But it'll be much better to do it more quickly, and the important thing to do it more quickly is to renegotiate a lot of mortgages. Let's start with small businesses. Where does a lot of the wealth of the kind of people who start small businesses lie? In their houses. So right now, with a house underwater, it's not going to grow out for a long time. And so the ability of small business to start up new things and expand is highly limited.

Hobson: If people are listening to this interview, is there any reason that they should think that we are going to be OK -- that we'll get out of this in the next couple of years and be fine?

Diamond: I have no doubt sooner or later we'll get out of it, but the real question is the distinction between sooner or later. What I worry about is whether Congress will, in a bipartisan way, take things that neither party necessarily favors, so we get a good compromise and move forward -- or whether we get more stalemate. Stalemate hurts the economy in multiple ways -- that we don't get the legislation, and that people get increasingly concerned about a dysfunctional government.

Hobson: Nobel prize-winning economist Peter Diamond from MIT. Thank you so much for joining us.

Diamond: Happy to have had the chance.

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