U. of Wisconsin Dean's Perspective on the Economy

by: Kevin Price November 20, 2008    

Kevin S. Price

Author's websites:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Courtesy of the Wilson Law Group, an excellent estate-planning firm here in Madison, one of your correspondents attended a fascinating talk last night. The speaker was the Dean of the University of Wisconsin School of Business, Michael M. Knetter (yes, the "k" gets a little enunciation).

Knetter spoke for nearly an hour on a broad range of topics, from international trade to the credit bubble to tax policy. Here are a few highlights, in no particular order, from last night's event:

  • Household savings rates tend to be high when economic pessimism prevails, and low when people are more optimistic. This makes intuitive sense, but Knetter's mildly counter-intuitive take on U.S. savings rates is that low savings rates are simply rational responses to (reasonably) sound expectations of future gains in income and wealth. So while negative savings rates aren't sustainable, they've also been very rare, and it's more important to have broadly prosperous economic conditions (of which anemic savings are a symptom) rather than high savings rates per se (which tend to reflect poorly on current and expected prosperity). U.S. households will (and need to) rebuild their balance sheets in the coming months, but we should hope they don't all do it at once.
  • Securitization per se wasn't the fundamental cause of the real estate bubble. Lending standards were. In fact, securitization does a lot to bring borrowing costs down for homebuyers (and other types of borrowers, for that matter). Knetter illustrated his argument by pointing to his hometown of Rhinelander, Wisconsin, which during the Dean's youth was essentially a one-company town. In that environment, and if they were forced to retain all the mortgages they underwrote, local lenders would have every reason to fear that a closing of the paper mill would destroy their mortgage portfolios. So they would lend to some would-be borrowers (but not nearly all) and they would do so at substantially higher interests rates to hedge against the risk of major losses. What matters most is lending standards. Given sane lending standards, securitization works just fine. [To Knetter's excellent point we'd add this: Sane lending standards are important; sane ratings of mortgage-backed securities are also essential.]
  • The U.S. is well-positioned to benefit from growing demand in emerging markets. Much better-positioned, that is, than Europe and Japan. So Americans shouldn't fear economic development in BRIC & Co. To the contrary, we should embrace it.
  • The U.S. should move to tax consumption and pollution rather than capital and labor. [Intriguing. Unlikely, but intriguing.]
  • Investments in infrastructure might help mitigate the recession, but infrastructure that exacerbates U.S. dependence on the automobile will be a Pyrrhic victory.
  • Nothing matters more than re-starting the heartbeat of lending and borrowing, which requires a re-boot of confidence in the future. That isn't just a matter of economic indicators and technical stuff. It's a matter of emotion and psychology, and Barack Obama might be one of the few humans capable of getting people to feel better, a little more optimistic, before the tide clearly turns. Indeed, the tide may not turn without such a change of national heart. 

Great stuff from a very smart dude.

Related Articles

This article has 6 comments:

  •  
    Nov 20 09:20 PM
    I suppose todays economy is down the tubes for all the bad reasons cited by the author. It's way too simplistic to solve todays problems anytime soon by the author's suggestions. Suggest he go back to school...MarvinMBA
    Reply | Link to Comment
  •  
    Nov 21 12:52 PM
    Just another university wonk who thinks people are listening to him because they are sitting in an auditorium checking their email on their iPhones and he happened to be wander into the auditorium.

    They probably thought is was a Bon Jovi concert.
    Reply | Link to Comment
  •  
    Nov 21 12:53 PM
    Try that again:

    Just another university wonk who thinks people are listening to him because they are sitting in an auditorium checking their email on their iPhones and he happened to wander into the auditorium.

    They probably thought it was a Bon Jovi concert.
    Reply | Link to Comment
  •  
    Nov 21 02:06 PM
    Kevin Price- your taking the time to write this article and share what you heard is appreciated by moi. I can't understand what turned off the three commentors before me. Actually consumption is already taxed by way of sales taxes and Cap and Trade may tax pollution. I agree that lending and borrowing has to get going. The "infused" banks have to let go of the cash.
    Reply | Link to Comment
  •  
    Nov 21 10:07 PM
    carey_jim,

    You can say that again!
    Reply | Link to Comment
  •  
    Jan 01 03:46 PM
    "BRIC "
    The economic development and growing demand in emerging markets Like Brazil,China,India and Russia should benefit the US!
    The use Economy will be in 1 good position!
    Reply | Link to Comment
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Kevin S. Price

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Market Strategy
Bonds
Dollar/Currencies
Earnings