By Kim Jae-kyoung
Staff Reporter
A noted economist has claimed the global economy will not see a meaningful recovery until banks' ability to lend to companies and individuals is fully restored, indicating that there might be a "double dip" downturn down the road.
At a press conference in Seoul Tuesday, Thomas Sargent, an economics professor at New York University, said that the key things to watch in order to predict where the economy is headed are the unemployment rate and the health of private institutions ― the restoration of the ability to function as a bank.
``What has happened in the United States was the socialization and nationalization of lending activities. Private institutions are not making loans. It's the agency of federal governments,'' said Sargent who is in Seoul to participate in the 2009 International Conference hosted by the Bank of Korea (BOK).
``I don't think you can have sustained recovery until that's over or until we have a lower unemployment rate and private institutions and big banks are back on their feet,'' he added, noting that the jobless rate is still rising at a rapid rate.
Sargent, who is also a senior fellow at the Hoover Institution, did not rule out the possibility of a double dip downturn, meaning that the global economy will slide into a deeper slowdown following a mild recovery.
``If you look at the Great Depression in the U.S. between 1929 and 1933, there were a number of periods when there were substantial stock market booms,'' he said.
``The stock market doesn't go straight down because there is a big rally on the way down. The same thing is true for output,'' he added.
He also pointed out that the ongoing global recession has blurred the division between monetary policy and fiscal policy.
``The U.S. has an independent central bank that handles monetary policy, and a treasury and the Congress that deal with fiscal policy. But this crisis is making the line between the two blurred,'' he said.
``For example, the Fed pays interest on reserves, and paying interest on reserves requires you to have resources to pay. It is fundamentally a fiscal authority,'' he added.
Regarding the crisis theory by his New York University colleague Nouriel Roubini, known as Dr. Doom, Sargent said that Roubini was right in predicting the direction of the economy but he was wrong in the reasoning.
``Roubini predicted this crisis for a long time. But the reason that he predicted this crisis has not happened yet. He forecast that central banks in Asia and the Middle East that are holding a large amount of U.S. dollars would rush to cash them in,'' he said.
``But they haven't yet. They have done the opposite. Many people say Roubini has been right but he has been dead wrong,'' he added.
Sargent specializes in the fields of macroeconomics, monetary economics and time series econometrics. He is known as one of the leaders of the rational expectations hypothesis.
In the meantime, in an opening speech at the conference, which will last through Wedneday, BOK Governor Lee Seong-tae stressed the need to strengthen regulations on excess borrowing by firms and households.
``Policy initiatives should be directed toward moderating the fluctuations of the credit cycle. To this end, we should consider introducing regulations to discourage borrowing by economic agents beyond an appropriate amount,'' he added.