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.