Fallout: The Financial Crisis

Weekly Wrap: What’s ahead in 2009?

Kai Ryssdal Dec 26, 2008


KAI RYSSDAL: Wall Street’s not going to have Friday afternoons to kick around anymore this year. We got out of the markets today without any of the last-hour hysterics that’ve been so common lately. And yet there’s more we don’t know about what’s going to happen in the New Year than we do know.

So, a little something different this Friday for our Weekly Wrap of Wall Street and beyond. Politics mixed in with the economic. Michael Mandel writes for Business Week. Dan Drezner teaches political science at Tufts University. Hello to you both.

DAN DREZNER: Hello, Kai.


RYSSDAL: Michael, Let me start with you and ask you this sort of very macro, classical year-end question: Has what happened this year in the economy changed the way we behave?

MANDEL: Yes, it has. At this point it’s really discouraging people. It’s making them much more pessimistic about the future than they’ve been in the past. It may turn out that they’re overly pessimistic, but we don’t know that yet. So, that’s what’s happened right now.

RYSSDAL: The reaction, though, Dan, is going to be a political one when the new administration takes over. What’s going to happen in this stimulus package that we’re going to get? I’d like your sense on how big it’s going to be and how well it’s going to work.

DREZNER: I think the better question to ask is what’s not going to be in the stimulus package. This is going to be a pretty large package. I mean, you’ve heard rumors ranging from $500 billion to $1 trillion. Although, there are fights already brewing over what the nature of the stimulus is going to be. Are they going to focus on green investments versus more traditional manufacturing? But my guess is the Obama approach is probably going to be, “Why not spend on everything?”

Given the need for pumping up the economy, I think you’re going to see a much bigger stimulus package than people have been talking about to date.

RYSSDAL: Michael, $1 trillion?

MANDEL: I’m betting on $1 trillion. I think it’s going to include aid for state and local governments, extended unemployment benefits, both to sort of get this stuff moving in the short run and then they’re going to have a bunch of stuff that’s going to be more long-run hit in a year, even two years out.

DREZNER: Michael’s right. And one of the problems is that a lot of the stimulus packages that have been talked about — things like building infrastructure — most studies have shown that it takes about 18 months for that stuff to sort of kick in to the national economy.

RYSSDAL: All right, but wait a minute. Because, I’ve been told — and a lot of economists have been saying — you know, 2009ish, June, July, August, things are going to start turning around and we’re going to be fine. Why do we need stimulus that lasts beyond the end of this recession?

MANDEL: Which economists are you talking to and when did you talk to them?

DREZNER: These are people in California, aren’t they, Kai?

RYSSDAL: Yeah, well, that’s right. It’s the L.A. economists.

MANDEL: Here’s the problem. Right at this point everybody’s ratcheting down their forecasts. And what we’ve moved into is the doom and gloom phase of the economic forecasting, where people are actually projecting a downward-sloping line. And really they’re also projecting not just a lack of recovery but that, even into 2010, the recovery is going to be very slow. So, I think what’s happened is there’s a lot of consensus that this is one occasion where you throw a lot of money in and you don’t worry so much when it’s going to hit.

RYSSDAL: All right, here’s where you guys earn your money. What are we not thinking of that needs to be fixed for things to get going again? Dan, you first.

DREZNER: I think one of the things you’re going to have to fix is the fear of rising protectionism. One of the natural instincts in a downturn is for countries to try to protect their own. The U.S. bailout of the auto sector, for example, is certainly one example of this. But to what the United States looks like a natural reaction to a failing manufacturing sector, to a lot of the rest of the world looks like illegal subsidies. The United States protested, for example, when Airbus received subsidies because it was in financial trouble a couple of years ago. You know, the European Union is going to point to what the U.S. has just done and say, “How is that any different?”

RYSSDAL: Michael, what about you?

MANDEL: Actually, I agree with Dan 100 percent. I did a story about a month ago on how much of a fiscal stimulus was going to leak overseas. And so imagine what happens when they start rolling out this infrastructure spending. And we asked the question, “Is the steel and the concrete going to be bought in the U.S. or overseas?” I think that a fight over protectionism is going to turn out to be one of the big issues in 2009.

RYSSDAL: Dan Drezner at Tufts University up in Boston. Michael Mandel, we talked to him in New York. He’s with Business Week. Thank you both.

DREZNER: Thank you, Kai.

MANDEL: Glad to be here, Kai.

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