Money Down


By Brad A. Greenberg '04, Illustrations by Lou Beach

Published Apr 1, 2009 8:02 AM

No one would accuse the people behind the UCLA Anderson Forecast of being Pollyannas. The lauded Bruin economic forecasters were way ahead of the curve on identifying the tech bubble that popped in 2001 and were cautious about the run-up in housing prices that followed. The quarterly forecast issued in December, which predicted the recession would burrow deeper in 2009, was similarly unsparing.

The nation's unemployment rate, already higher than it had been since 1992, would climb to 8.5 percent by early 2010, the forecast predicted; the U.S. housing market would continue to suffer; consumers would keep tightening their purse strings. The economy, the forecast concluded, was in for a long slump.

The situation in California is even worse, if that's possible. The prospect of a $42-billion budget deficit and a divided Legislature at war with the governor have pushed the Golden State, in the words of one assemblywoman, into "undeclared bankruptcy."

"There comes a point where if you are driving your car to a cliff, if you come close enough, it doesn't matter what you are going to do. Whether you step on the brakes or turn to the left or turn to the right, you're still going over the cliff," opines Daniel J.B. Mitchell, professor of management at UCLA Anderson School of Management and at the School of Public Affairs, employing a metaphor that's becoming ever more common. "If California hasn't already gotten to that point, it is very, very close."

In this sea of bad economic news, there is no shortage of opinions about what needs to be done to turn the U.S. economy around. There's also no indication of what will work.

"A well-designed plan needs to deal with the fact that in the long run we need to save more and prepare for the aging of our population, but in the short run we need to save less, because people focusing on their personal savings has made this worse," notes Edward E. Leamer, director of the quarterly Anderson forecast. "That is a delicate balance."

And that's an understatement. In search of solutions, UCLA Magazine canvassed Bruin faculty and alumni for economic insight. Their opinions vary widely. There's a lot of talk about cliffs, of course. Doubts about President Barack Obama's fix — and whether Franklin D. Roosevelt's really worked as well as we think it did during the Great Depression. Even a radical call to create a new central bank.

To Fed or Not to Fed

"Government intervention will never stop anything. It is just a big waste of money and transference of payment from taxpayers to financial institutions that made bad decisions and should go out of business," declares Richard Roll, the Japan Alumni Chair in Finance at Anderson.

A New York-based Bruin, Aswath Damodaran Ph.D. '84, professor of finance at New York University, demurs, saying that there is, in fact, a lot the federal government can do to improve the economy. But efforts so far have been frenetic.

"One of the problems I've had with the bailout package over the past few months," Damodaran says, referring to the $700-billion rescue for the financial markets that Congress set aside in September, "is that every morning you wake up and there is some new twist on it that you didn't know before. The market has enough uncertainty without that."

The bailout was originally supposed to unfetter banks by buying toxic securities. That plan was dropped and it became a source of capital for banks. Then the bailout, known as the Troubled Assets Relief Program (TARP), expanded its funds beyond banks and eventually to the automotive industry. The stock market responded accordingly in late September and October, on some days dropping 700 points in the morning before finishing up 300; more often, the market moved in the opposite direction.

"The market right now is like a child with a parent that has gone completely haywire. It doesn't know where to look," Damodaran says. "It needs at least one authority figure who can tell it what is coming down the pike. The government needs to say, 'This is what we are going to do,' and stick with it."