The ICAS Lectures


The United States Economic Crisis:
Issues and Challenges

Greg Ip

ICAS Spring Symposium

Humanity, Peace and Security
The Korean Peninsula Issues
May 21, 2009 1:00 PM -- 4:30 PM
Senate Dirksen Office Building Room SD 419
United States Senate
Captiol Hill, Washington, DC 20510

Institute for Corean-American Studies, Inc.

965 Clover Court, Blue Bell, PA 19422


Biographic Sketch & Links: Greg Ip

The United States Economic Crisis:
Issues and Challenges

Greg Ip
U.S. Economics Editor
The Economist

. . . one of several, but as any of you who are readers of The Economist know, there are no bylines or names in The Economist, which means that I'm allowed to take credit for everything that's in it, and also to deny responsibility for anything that I wrote that you don't happen to like!

Thanks very much for having me, Sang Joo. It's a pleasure to be here. I'm going to divide my remarks into three or four sections. The first I'll tell you a bit about how we got to where we are, the roots of the crisis and what made the crisis become such a severe recession. Then I'll talk a little bit about the policy response, both fiscal, federal and regulatory response to this recession. And I will talk about whether we are experiencing a turnaround and what the shape of the recovery is likely to look like and some of the latent risks that I see persisting into this recovery period.

This recession and crisis had three main forces at its origination, and to understand its origins you actually have to go back to the early 1980s and the defeat of inflation which ushered in a multi-decade period of declining inflation and unemployment, an infrequent and mild recession, and we came to call this period "the great moderation." What this meant was that there was reduced volatility in the overall economy and when there's less volatility it means people are willing to take on more risk, which means that they will take on more leverage, more dollars of debt . . . per dollar of equity. This is a perfectly logical response to a world that's less risky.

Much of this leverage actually did not grow in the banking system, although we've come to call this a banking crisis, but it grew in what we have come to call the "shadow banking" system which was a superstructure of financial companies built up around traditional banks but not actually having the properties of traditional banks. They did not take in deposits. They were not thoroughly guaranteed or regulated, and they tended to have extremely thin cushions of capital. I'm thinking of finance companies such as the sub-prime lenders, most of them based in Southern California with names like New Century and Ownit, and Option One, which became very major players in this sub-prime and finance industry. Then there were also the investment banks and the hedge funds and off-balance sheet vehicles, all of whom had the property, essentially borrowing short in the commercial paper markets, and lending long by making mortgages or purchasing other long-dated securities.

The second force that happened was what we have come to call the "global saving glut," and this was something else that originated in the 1990s. During the Asian financial crisis of which Korea was one of the most spectacular victims, there was enormous flight from these countries. Their currencies collapsed, interest rates shot up, and they all endured extremely severe recessions, even depressions. In order to stabilize their economies, they had to turn to the International Monetary Fund and the U.S. Treasury for assistance, but that assistance came at a very high price. It came with strict conditions on how they were to run their economies, which were extremely poorly received. Especially so in Korea. To this day what we call the Asian crisis, Korea calls the IMF crisis, and what it did is it created a cultural determination among all developing markets to not put themselves in a position where they would be so vulnerable to influences of capital that they would again have to subject themselves to the influence or the orders of the IMF or the Treasury. And so what they did was - they pursued policies of holding down their exchange rates, developing large trade surpluses which were then reinvested in U.S. Treasury bonds, Treasury bills, and similar debt of other borrowing countries. That had the impact of holding down long term interest rates, and we've come to call this the "global saving glut." By holding down long term interest rates in the United States, it gave a boost to any sort of asset class benefits from low interest rates, most significant of which was of course housing.

Finally, the third force was what I call the "bipartisan consensus" in this country for increased home ownership which essentially meant that as credit became easier, thanks to the sub-prime innovations and this influx of capital from overseas, it was very difficult for anybody to essentially say "This is wrong. We need to put a stop to this," because the fact of the matter was that more people were buying homes, and those who had homes were seeing their value go up. It's very difficult for anybody in policy to actually stand up and say "this is a bad thing." So the excesses were allowed to continue with no serious check from regulators.

The question obviously arises: Did the Federal Reserve contribute to this by holding interest rates too low for too long? In retrospect, almost certainly yes. I say that "in retrospect" because at the time, it looked like an appropriate policy, given the risks of deflation that existed in the economy after the collapse of the tech stock bubble and the amount of spare capacity. But it was probably not the main cause because the Fed did begin to raise interest rates in 2004 and it continued to do so until 2006 and yet there was almost no response from long-term interest rates. They continued to remain unusually low, and this allowed the housing bubble to continue.

There's also been a lot of questions raised about sub-prime loans, rating agency negligence, fraud by either lenders or borrowers alike, and yes, these did all contribute to the crisis. But I think you have to understand that it would probably be a mistake to think that they actually caused the crisis because you have to remember - greed is not new to our society. We have had greed as long as we have had people, and we've had corrupt bankers and excessive risk-taking as long as we've had money. The question you have to ask yourself is: what circumstances allow the forces of greed and risk-taking to become so out-sized that they produce a crisis? And that's why I say you have to look at some of these other things like the growth of leverage and the global saving glut.

So how did this become a recession? Well, eventually home prices stopped going up and they began to decline, and this resulted in a surge in defaults among people who had borrowed houses without the means to repay the money, and whose only means of staying in that home was to continually re-finance with the help of an appreciating home, and so once appreciation stopped, defaults began to rise. This however triggered a rapid re-pricing of risk and leverage throughout the entire financial system, not just in that narrow corner that we call the sub-prime mortgage market. Indeed, the bursting of the housing bubble we can now see was the front edge of a broad de-leveraging throughout the economy. And by "de-leveraging," I mean the situation where you go from being willing to take on more debt and more assets for each dollar of your income or each dollar of your equity, to a situation where you're trying to do the reverse - to try and cut back the amount of debt you're carrying for each dollar of income that you have.

Banks entered the crisis with fairly good capital but that kind of misses the point because the real leverage, as I said a minute ago, was outside the banking system among the so-called "shadow banking" system, and so given that they had so little capital with which to absorb losses, they were the first to collapse. As that system of credit intermediation collapsed, the source of new funds to support housing purchases also collapsed, credit tightened, and then the next wave was that people who actually had acquired mortgages on a sensible basis, prime borrowers who put down mortgages, could no longer get financing; people who had reasonable incomes and jobs could not get financing. And this spread throughout the economy. Then as consumption dropped, production collapsed in companies and they began to lay people off. Inventories skyrocketed. Now, because the United States imports so much of its manufactured goods from the rest of the world, and in particular East Asia, the impact of the United States and other developed countries that were going through this, cutting back on their consumption of durable goods was to in some sense export the shock to their suppliers, which meant China, Japan, Korea, and all those other countries which have come to depend so heavily on the export of durable goods to the United States. And so it became a global collapse, all of it driven in some sense by a need by producers to reduce the inventories that had piled up as a result of falling sales.

Then at the same time you had the collapse of stock prices driven not just by the worsened economic outlook, but by the de-leveraging by hedge funds and others who had large positions in stocks, and this produced one of the largest declines in household wealth as a percentage of income that we've ever seen. That has had and will continue to have very serious wealth effect by which we mean the tendency of anybody whose wealth goes down to spend a little less every year.

The recession now that we see it in terms of loss of GDP is roughly on the scale of the worst of any that we've see since the Second World War. In terms of loss of jobs it is now the worst recession we've seen since the Great Depression. We've seen - commensurate with the depth and magnitude of the recession - we've seen a very aggressive policy response, and I'll go quickly through the five main facets of this policy response. The first was conventional monetary policy by which I mean the Federal Reserve cut interest rates all the way from 5.25% to 0. But that really wasn't enough. Economists use something called the "Taylor Rule" as a kind of a benchmark for how low interest rates ought to be given where inflation is and given where you think unemployment is relative to where it can be when the economy is operating at full employment. It's a very nice little rule because it tends to track what the Fed actually does over time. If you actually run the Taylor Rule formula right now it tells you that the Fed should have the short term interest rate a -5%. Now, it doesn't take a genius to know that you cannot establish a -5% short term interest rate, so that is why the Fed has implemented what we now call "unconventional monetary policy," which is essentially a means of trying to stimulate spending, or at least to restrain the collapse in spending that's going on by means other than the short term interest rate. So for example, as the banking system contracted and the shadow banking system collapsed, the Fed used its own balance sheet to supply the credit to industries whether it was borrowers or mortgage holders or companies that issue commercial paper. The Fed essentially stepped in and said, "if you can't get the money from the traditional banking system, we'll advance you the money through a variety of liquidity facilities and guarantees." And the other was to then do what they call quantitative easing, which was now that their short term interest was 0%, they've tried to lower long term interest rates by purchasing large quantities of Treasury Bonds and mortgage backed (?) securities. That's the second policy response.

The third was conventional fiscal stimulus. In 2007 we had a tax cut - it was temporary but it was more or less diluted by what we had at the time - it was a simultaneous rise in oil prices and it basically wiped out all the beneficial impact on purchasing power of the tax cut. So this year we had a much larger fiscal stimulus on the order of $787 billion, the largest discretionary fiscal stimulus in history relative to GDP. It sounds like a lot but you have to understand that in this period, the U.S. economy has been operating roughly 8% to 10% below its potential level of output. That amounts to missing demand on the order of $2 to $3 trillion and so relative to that, the fiscal stimulus is actually not that big. It only gets you about a third of the way back to pushing the economy back to full strength.

The fourth piece of the policy response, perhaps the most important, was a two-prong system of attacking the financial crisis by re-capitalizing banks and removing bad debts from their balance sheets. So in October we started with a round of capital injections into the nine largest banks, and what followed is what has come to be called the "convoy system," which essentially means the convoy moves at the speed of the slowest ship. So when the first round of capital was injected, the idea was - we're going to try and bring the system back to health at the speed of the weakest bank. Everybody will be treated the same way. The idea was to avoid stigma, so that all banks would be willing to accept this capital, re-liquefy their balance sheets, and enable them to lend as a healthy economy requires. But it didn't work very well, and so you had a triaging process and in the new stress tests that were released a few weeks ago, the Treasury Department has pursued a completely different approach which is basically separating the strong from the weak, and the strong will be allowed to pay back the capital, and the weak will be re-capitalized with significant strings attached.

The other prong of this was bad debt removal - the original purpose, actually, of the Troubled Asset Relief Program, but one that was set aside because the need to re-capitalize the banks became paramount. So the Treasury has introduced their strangely named PPIP - it stands for Public Private Investment Partnership which I don't think anybody can remember it from hearing it just once! In any case, the idea is that the Treasury will supply a modest amount of capital and the Fed will supply a large amount of credit to anybody who wants to go in and buy some of these bad assets at a steep discount. The idea is that way they get them off the banks' balance sheets, you create some certainty as to the price of these assets, and you get the market working again. Unfortunately, the prospects of it don't look so good because in the spasm of populist outrage at banks and so forth, Congress imposed a whole series of conditions on any bank or firm that took advantage of the Troubled Asset Relief Program, and there's a great deal of reluctance on the part of private investors, especially those who remain healthy and in no need of federal help, to get involved with any of these federal programs for fear that they will be stuck with conditions that did not exist at the time that they actually began to participate.

The fifth piece of the policy response was foreclosure mitigation by which I mean steps that the Federal Government takes to help people who have mortgages avoid being foreclosed on, on the theory that the home that's foreclosed on loses approximately a third of its market value. So it ought to be possible to get banks and lenders together and agree on some reduced value of the mortgage that is both easier for the borrower to pay back and a better outcome for the lender than a foreclosure. But this has been surprisingly difficult to achieve, essentially because of game (?) theory problems where the bank doesn't want to give a break to any lender who doesn't really need it, and lenders don't actually want to pay back loans that are worth more than the house that secures them. And so they have this strong incentive to actually end up defaulting.

The first few programs that were initiated in the Bush Administration to deal with this problem never fully resolved that tension. Obama has come out with a new plan this year - this $75 billion plan to put some government money into the refinancing of mortgages provided the payments are reduced, and a second piece which is actually much more helpful, which is to allow anybody who's still current on their mortgage to refinance with Annie Mae or Freddie Mac at a lower rate, even if their home is worth less than the mortgage, because typically mortgages cannot be refinanced if the collateral value is less than the mortgage value. So essentially that condition locked a lot of people out of the ability to refinance and take advantage of the decline in mortgage rates that we've had. And that's actually had some very positive response. It's been very good in terms of helping people's cash flow and so forth, but it's not, by itself, enough to turn things around because you still have all those bad debts out there, people with homes worth less than their mortgages, sort of still having latent incentive to default and the banks still unable or unwilling to recognize the true depreciative value of the loans, and therefore unable to write them down, move passed it, and return to lending to the healthy economy.

Now after that - so the positive response has had some impact. In fact it now appears to be that the recession could be just months away from ending, if in fact it's not even ending as we speak. Some of the positive signs that - the weekly claims we see for unemployment insurance have actually begun to drop, although they remain extremely high. We see signs that that very big build-up in inventories that cause so many companies to cut production and lay people off has now begun to drop relative to sales, and so once inventories start to drop, companies will stop laying people off. And we've actually seen some positive signs in the financial markets where the very high premiums that it costs anybody to borrow have started to come in again as lenders begin to trust each other and to believe that the world's not coming to an end. And the stock market has rallied - rallied significantly. Now it's only made back about a third of what it's lost in the last year-and-a-half, but it's going up, which is a nice change. And that is a confidence builder, it makes people feel a little bit more wealthy, and it may be telling us something about the end being in sight.

What's behind this turn? Well, as I mentioned, inventories did come back into line. More important, some of the - one thing that did not change - a lot of things changed in this business cycle, but one thing that did not change is that - if you make something cheap enough, eventually somebody will want to buy it. And houses, after having been grossly over-valued at their peak in 2006, have fallen so far in value that in most cities across the United States, they're actually at or below their traditional valuation relative to things like rents and incomes, and in only a few cities like in pockets of Florida and the Midwest and places like Washington, DC do they remain notably out of line. So that's brought people out of the woodwork, people who had been locked out of the housing market because prices were too high, and investors who actually have a lot of money on hand and are willing to take a chance that they've found the bottom. And don't forget, the level of activity that we're talking about is still extremely low. The number of new houses being constructed is about one-quarter of what you would typically expect just to keep up with the fact the population keeps growing and people need more homes over time.

The same thing can be said about the stock market, by the way. Irrespective of what you think the outlook is for the economy, stocks are quite cheap. If you look at what you can get from just owning stocks from their dividends, it's actually a little bit more than you would get from owning bonds. And that's the first time that's been true in over 50 years. So a bit of a turnaround there.

And banks themselves - it's actually not a bad time to be a bank if you do not have hundreds of billions of dollars of bad debt on your balance sheet and the Treasury breathing down your neck telling you what to do with your compensation plans or not to go on that golf outing to Scottsdale. Because you can essentially borrow at about 1% because the Federal Reserve is holding interest rate so low, and you can lend at 4% or 5% or 6%. Anybody who's tried to get a loan knows that you cannot borrow from the bank at the rate that the Federal Reserve has set which is close to 0. Well, somebody's enjoying that spread, and it's the banks now who are actually making new loans. So given that it's actually not a bad time to make loans, you have seen some modest recovery in the supply of credit.

Now those positive signs notwithstanding, I continue to be somewhat pessimistic about the profile of the recovery that is going to follow this recession. I think that economic growth will be very weak for some time to come, and very vulnerable to renewed recession, for several reasons. The first is that we have experienced a record loss of homeowners' wealth in the last year. In the past, when stock prices went down sharply, such as 2000-2001, that was offset on the average household by the fact that their homes retained their value and in some cases actually went up in value. In this case, we've got stocks going down, we've got homes going down. So you're getting a one-two whammy on people, and the impact of homes is in some sense even more severe on people's financial flexibility than the equivalent loss of stocks because so many people were able to borrow against the value of their homes to do things like home renovations or to add to their stock portfolios. So we know from various research that this negative wealth effect of losing so much wealth tends to linger for a period of several years and suppress consumption, and to inspire people to try to build up their savings to rebuild the loss of wealth that they've experienced.

The second reason to be somewhat pessimistic is that this is a globally synchronized recession and indeed, the collapse in output that the United States has experienced is actually small relative to what you see around the world. If you look at the front of the Wall St. Journal today, you'll see a very telling graphic which shows that the economy in the United States shrank at about a 6% annual rate in the first quarter, but Japan's shrank at a 14% annual rate, and we've seen declines of comparable magnitude in most of western Europe. So that just - in the past we have had synchronized recessions, but none quite as severe as this one. And it essentially means the United States cannot rely to any great extent on the rest of the world to pull it out of recession.

Third, and finally perhaps most severe is that research by the International Monetary Fund and others has found that when recessions are caused by financial crises, they tend to take much longer to recover from than recessions that are caused for example by oil shock or the Federal Reserve raising interest rates to suppress inflation, and other causes. Why is this? Well, a financial crisis is an extremely traumatic event. It really basically destroys a lot of the traditional relationships and expectations within our private sector economy and makes it very difficult for the wheels of risk-taking, entrepreneurialism, and wealth creation to get re-started. In fact, you should think of what's happened to the financial system as a supply shock. Economists refer to a supply shock as something that actually hurts the production potential of the economic, that actually impairs the availability or raises the price of the inputs that goes into the economy. So for example, if OPEC cuts off the supply of oil to the United States, that's a supply shock as opposed to a demand shock where people just didn't want to spend.

Think of what's happened to our financial system as a bit of a supply shock, comparable to - well, for example, it's a bit like - imagine that we had destroyed one-third of the country's electrical transmission lines. We still have power generators, and we still have people who need electricity, but we don't have the means to get the electricity from the generators to the people who need the electricity. We could try and take that electricity and run it through the other two thirds of the grid that's remaining, but pretty soon you would overload the system and it would have to shut down. That is very analogous to what's happened to our financial system. It's that a very large portion of essentially the transmission grid that got the savings from people who saved money to the borrowers, the people who need money to borrow whether it's to buy a home or to finance the accounts receivable of their small business, has been destroyed and there's no way to get that money from the savers to the borrowers. You could try and run it through the banking system but the banking system is already overloaded with demands on it. It's trying to meet demands for back-up credit lines from banks and so forth. Its own capital has been depleted by the losses it sustained on its own books. So essentially you do not have the ability to run the necessary amount of credit to support a healthy economy through what remains of our financial system.

Now, as it happens, the recession has been so severe that it no longer is much of an issue that the supply of credit is constrained, because the demand for credit has also collapsed. Very few firms want to expand their businesses now, so they don't want to borrow, and a lot of people are just too nervous or too constrained in terms of their own ability to make a down- payment to buy a house. So you have a situation now where it's not really the supply of credit that continues to afflict the economy as much as it is the supply and the demand for credit.

The crisis is still not over. We have just been through a round of stress tests on our banking system which concluded they need $75 billion more in capital in order to meet a plausible scenario of weakness of economic weakness in the next year ahead. And there remains a great deal of uncertainty about whether these tests were stringent enough and what the true health of the banks is. In fact, one of the enduring features of this crisis has been the gap between the views of the banks and the regulators who think the banks are solvent and have lots of capital, and the views of the market that thinks that the banks are insolvent and severely depleted in capital. This chasm in views is one of the reasons that it's been very hard to restart the system because banks don't want to issue new stock, or they can't issue new stock because investors don't think that they're solvent; and investors do not trust the banks who have written down their debts to - or the loans that they're carrying on their books to realistic levels.

One of the ideas of trying to buy back their debts through some kind of transparent process and of the stress tests is to eliminate this chasm of perceptions between the regulators and the banks on the one side, and the investors on the other, and it remains to be seen whether that will be successful.

Because I expect the economy to be very weak, it will not grow fast enough to absorb all the number of people looking for work each year, and so the unemployment rate which is almost 9% will almost certainly top 10% by the time all is said and done. In a situation where you have high unemployment, unused business capacity, a lot of downward pressure on wages and prices, is one where the inflation rate, which is around 2% now - it's around 0% but that's mostly because of the decline in fuel prices that we've experienced in the last year. But if you take out the impact of fuel and food, the so-called core inflation rate is still around 2% which is more or less where it's been for about 10-15 years now. But in my view, it's headed downward because the enormous amount of unused capacity in the economy will put enormous pressure on businesses to cut prices, and on workers to accept lower wages, and therefore I think there is a risk that the very low inflation - we will have much lower inflation and possibly deflation. That means that there is a risk of relapse because when prices and incomes are going down, it becomes that much harder to pay back all those debts people have, and the banking system will not get back to a healthy situation. This is indeed what the Japanese went through during the 1990s where the economic never did develop significant traction, and so deflation ensued.

What that means is that the Federal Reserve, when it has to think about the monetary policy it needs to maintain for the next few years, there's going to be a lot of temptation to think about exit strategies, to not repeat the mistakes of the last cycle which to hold rates too low for too long. And I worry a little bit about - that they may be stampeded into tightening monetary policy too soon, or that they simply will not make it loose enough to accommodate the very weak economic conditions that we have now.

Similarly with fiscal policy, even under the somewhat optimistic forecasts of the Obama Administration, the national debt is going to double from about 40% of GDP last year to 80%, and those are terrifying figures. They rightly raise questions about out ability to pay it back without resorting to such radical measures as either defaulting or printing money to pay it back; that is to say, turning to the inflation tax. Now, I don't see anything in the makeup of the people who run the Federal Reserve or the Treasury right now to resort to those extreme measures, but the fact of the matter is that the bigger your debt is, the more people will suspect that that will be a tempting remedy for you, and they will charge you a premium accordingly. That's one reason why bond yields, in spite of all the trouble we have and the low inflation rate, have moved back above 3%. And there will be a temptation to - perhaps early in this process - respond to those concerns by implementing fiscal tightening, and in fact, we will have a fiscal tightening automatically in the year 2011 when the 2-year fiscal stimulus that was enacted this year expires. It's simply mathematics. It simply means that people whose take-home pay went up when their taxes were cut will see their take-home pay go down when those taxes return to what they were before the fiscal stimulus. Well that is a de facto tightening of fiscal policy and it's staring us right in the face in the year 2011 along with the administration's plans to allow a variety of tax cuts that Bush had implemented to expire. So there's kind of a cliff there in the year 2011 which raises some interesting questions about whether those tax increases will be allowed to occur - whether the economy will remain so weak that the administration and Congress will decide that no, they should be extended. But unfortunately, that puts us right back in that situation of the debt continuing to rise and the point at which it levels off being pushed further into the future.

A couple quick points about what the economy I think in the very long term will look like. We've been through a period of 25 years where people were willing to build up more debts and acquire more assets, and as they became wealthier they were willing to allow their homes and their stock portfolios to represent their saving. Where did they get all their - so - if they weren't going to save, where did they get the money that they needed to spend, because you can't just like spend your wealth because once you've spent it, it's gone. Well, they got it from our trading partners - countries like in East Asia and in Western Europe, and more recently oil producing countries who are willing to provide goods and services, oil, cars, toys, commodities, etc., and accept in return IOUs. Well, first of all I think that there are enormous domestic pressures to turn that around inside the United States. We've already seen the household saving rate jump up from 0% to about 4%, just because - if you think of the saving rate as made up of two types of people: people who want to borrow and people who want to save. The situation we have now, the people who want to borrow cannot borrow, and so they borrow less; and people who want to save, want to save more because they're worried about the future. So those two forces have pushed up the saving rate, and will push it up further in the years ahead. There has been a return to thrift, I think, because it will be harder to borrow in the future, and plus the loss of so much wealth means that in addition to the fact that we're all getting older and closer to retirement, you have a lot less means on which to retire. So you'll have to save more to do that.

Now, the problem is - if we're going to save more, somebody has to save less. That's just arithmetic, right? Saving and borrowing has to somehow balance out. Well, the most obvious place is that - first of all the Federal Government will do part of it in the short term because they are borrowing heavily in order to fund their fiscal deficits. But in the long term that cannot be sustained. So that means that hopefully, the world will re-balance with our trading partners saving less - that means primarily China which has had an economy excessively dependent on business investment and on exports, and these develop as domestic demand, reduce their household saving, and therefore reduce the pressure to export their excess savings to the United States and other countries. It remains an open question whether that transition can take place successfully without an outbreak of protectionism or some kind of international financial crisis with all sorts of negative fallout for the dollar and other exchange rates.

Politically here in the United States, you've seen the pendulum swing from being very laissez faire, anti-regulation, to being much more willing to be interventionists. It's clearly the proclivity of the Obama Administration. Now in my view, there's a great risk of over-reach here. In the early 1980s Reagan was elected on a mantra of "government is not the solution; it's the problem." So he had ambitious plans to weaken the unions, deregulate industry, cut Social Security and so on. But he got out ahead of the American people. The American people do not change their minds nearly as much as they change Presidents. And so for example, early in his term, Ronald Reagan had to retreat from some of his more ambitious steps like cutting Social Security, and I think there's an argument to be made that in a mirror-image sense, Obama is at risk of making the same mistakes; that he does take the view that government can be part of the solution - is more part of the solution than the problem. You see this in all sorts of aspects of his platform - whether it's cap in trade or health reform or expanding unemployment insurance. But I think he has to be wary of getting out in front of the American people and trying to essentially work against what remains a strong latent preference for small government in this country. If he doesn't - well, a couple things could happen. I mean if the economy continues to get worse, perhaps he'll eventually change minds and people will discover they like it just the way they came to like Social Security after Roosevelt created it in the 1930s, or they could punish him by - in the mid-terms in 2010, by taking away one of the majorities he currently has in Congress.

That's the end of my comments. Happy to take any questions you have on anything that I've discussed or the regulatory outlook, or anything else.

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