As the American economy drifts toward a possible recession, a common refrain from authorities has been to point to the "resilience" of our economy in recent downturns as reason for optimism regarding a quick recovery. However, as developments expose the magnitude of the situation, the imbalance of our economy is becoming increasingly clear. Instead of seeing resilience as a mythical force that will magically rescue the economy, we must all embrace resilience as a national goal that can only be achieved through diligent planning, assuming responsibility, and effective leadership at all levels.
In recent testimony before Congress, both Federal Reserve Chairman Ben Bernanke and Federal Reserve Bank of New York President Timothy Geithner contended that the rescue of Bear Stearns that was supported by the Fed was necessary to forestall severe consequences for financial markets and the economy as a whole. Congressional efforts to prop up the housing market and assist homeowners facing foreclosure are being justified on the premise that allowing millions of families to lose their homes would plunge the economy into deeper turmoil.
This is not resilience. The fact that such extraordinary government action is required to prevent catastrophic failure underscores the current vulnerability of our economy. We must endeavor to draw lessons from the current mess in order to prepare for the larger challenges ahead. The credit crisis is a wave that we are having difficulty wading through. The aging of the population represents a demographic tsunami on the horizon that could engulf us and generations to come if we do not prepare now.
Profligate consumer spending, propelled by easy access to credit and rising home prices that offset minuscule household savings rates, was a primary reason the U.S. has withstood past downturns with relative ease. The collapse of the housing market and resulting tight credit and diminished consumer confidence in the economy are driving down consumption, which means we will not be spending our way out of trouble.
The housing meltdown and credit crunch also exposed weaknesses in the financial infrastructure that must be addressed - namely the need for more transparency and accountability. The ability to deflect the consequences of risky decisions and lack of reliable information were primary factors behind the current economic dilemma. The result is that the market is flooded with overpriced homes, access to credit has been restricted as lenders have become more cautious, and investors are wary of bonds because they are unsure of their quality.
As we deal with the current crisis, we must also work toward building a truly resilient economy that can withstand market downturns, global upheaval and acute demographic change such as the aging of the populace. This will require developing more robust pillars to support long-term economic growth. Such pillars include a balanced federal budget, a streamlined tax system, a modernized infrastructure that facilitates the uninterrupted flow of commerce and strengthens our energy grid through "smart" technologies, a well-educated and highly skilled work force, a renewed focus on research and innovation, and increased transparency and accountability in government and markets. It will also require all Americans to insist that their leaders deal with the issue constructively while literally getting their own houses in financial order.
The public and private sectors must view this as an opportunity to collaborate toward building a stronger financial framework that will restore confidence and put the economy back on track toward long-term growth. While the public sector has a key role to play, policymakers must recognize that overreaching would further constrain markets and inhibit growth. Straightforward reforms such as requiring independent appraisals and utilizing advanced valuation technologies such as GeoScore to generate unbiased, market-accurate property appraisals can significantly enhance transparency in the mortgage process. Productive public-private partnerships will also be required to effectively tackle other matters critical to strengthening the resilience of our economy, such as ensuring the ability of companies to continue operations after a catastrophic event.
Resilience must be a substantive plan that we can all get behind, not a plaintive plea. We can harness the entrepreneurial spirit and optimism of the American people and achieve this objective through forward thinking and practical action in legislative chambers, corporate boardrooms, and American living rooms.
Paul Bateman is president of the Klein & Saks Group and immediate past president of the Economic Club of New York. Lawrence Hebert is chairman of the Board of Advisors for the Dominion Advisory Group and former president and chief executive officer of Riggs Bank N.A. They are chairman and member, respectively, of the board of directors of the Reform Institute, a nonpartisan public policy organization, www.reforminstitute.org.
© Copley News Service
Visit Copley News Service at www.copleynews.com.
