By John Norton

What to expect in the U.S. economy's recovery

Banker-author who predicted meltdown foresees two-year 'nasty recession' and 'tidal shift' in U.S. economic policy

As the massive scope of the country's economic crisis becomes clearer, and the federal government rushes to implement unprecedented measures to try to correct it, economists and analysts are trying to figure out how the world's economic superpower suddenly melted down.

But some experts say the crash should have been no surprise. One is Charles R. Morris, a lawyer and former banker, who predicted the current crisis in a book released in February, "The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash" (PublicAffairs, $22.95).

Morris predicts a painful multiyear recession while the U.S. economy is rebuilt. He also expects the government's financial policy pendulum to swing away from an unbridled free market approach to one that more closely resembles the Catholic social doctrine espoused by the U.S. bishops' conference.

Our Sunday Visitor: Your book went to press nearly a year ago. You forecast then a trillion dollar meltdown. Would your calculations today be any different?

Charles R. Morris: The paperback edition, which will be out in early 2009, will be titled "The TWO Trillion Dollar Meltdown." In the original, I make clear that the "trillion" is a minimum estimate, and that the actual number could be two to three times higher.

OSV: So far, we have seen the federal government take over Fannie Mae and Freddie Mac, let Lehman Brothers fail, put up $85 billion to save American International Group, and propose a $700 billion package to buy up toxic debt. Do you think these are the right moves?

Morris: I think they might have gotten ahead of it much faster. The crisis has been in full blast for a year. If officialdom hadn't kept insisting that it was just a short-term blip, and had taken stronger action sooner, it might have been less costly -- but to be fair, Wall Street would have fought them every step of the way. If I were in their shoes right now, I'd probably be doing much the same thing. Inevitably, however, a lot of very rich people will come out of the rescues even richer.

OSV: Your book identifies a whole series of factors that led to the current credit crisis. What is the heart of your analysis?

Morris: The short answer is that (a) Alan Greenspan believes that asset prices come from on high, and that bubbles are impossible, so he kept interest rates extraordinarily low for a very long time; and (b) the financial markets exploited the opportunity to create a false prosperity based on a debt-driven consumer binge. The hangover headache will be very unpleasant.

OSV: What steps would you propose to heal the U.S. economy? More regulation? Higher taxes? More disciplined consumer spending? Are you optimistic this will happen?

Morris: All of the above. And a lot of it will happen no matter what policymakers do. Consumers, for example, are utterly tapped out, so consumer spending will go down whether we want it to or not. If we just leave it to the markets to self-correct, we could have a long, nasty, recession. I expect we'll have a nasty recession in any case, but some intelligent policymaking could help ease some of the pressures. The first priority should be strengthening the social safety net, so ordinary people can absorb the inevitable layoffs and downturns without excessive pain. We run the most freewheeling economy in the world, but leave the ordinary Joe to absorb most of the risk.

OSV: You criticize the huge compensation packages of business and finance executives. Why is that a problem? The current crisis aside, aren't they just creating wealth that is good for the economy?

Morris: There has been an extraordinary concentration of income at the top 1 percent of households, to a degree seen only twice before in our history -- in the 1890s and in 1929. America has always chosen a higher degree of income inequality than European countries, and I think it's true that we have a higher degree of entrepreneurialism as a result. But when it's as overdone as it is now, it's counterproductive.

OSV: You quote an economist who says that economics is valuable but its importance shouldn't be exaggerated. And, in fact, you frequently point to demographic shifts and other factors as more likely primary causes for recent economic trends than the competing economic policies chosen by different administrations over the past decades. What do you see as the most important noneconomic indicators today?

Morris: Another way to put it is that an economics that doesn't take such factors into account is meaningless. There are tidal shifts under way in global population and wealth, with a very wide range of possible outcomes in just 10 or 20 years, that swamp the neat little forecasts that come out of economic models.

OSV: You conclude your book with several pages examining problems with our health care system. How does that fit into an analysis of this country's economic meltdown? And you note that among industrialized countries, the United States does a very poor job of making sure higher education -- assumed to be an important driver of a healthy modern economy -- is affordable. What are the biggest problems and how would you solve them?

Morris: American policy-making tends to swing back and forth in roughly 25- to 30-year arcs. One of the policy poles looks a lot like the Catholic social policy espoused by bishops' conferences; the other is much more red in tooth and claw.

I think we're at the cusp of one of those reversals now; in fact, it's overdue. But it's important to understand that each eventually falls into a kind of self-inflicted paralysis -- from self-privileging bureaucrats at the one extreme and greedy financial barons at the other.

OSV: How will this credit crisis affect ordinary Americans in the next year, five years and beyond?

Morris: I expect there will be a nasty recession that could run at least two years. The new administration should look hard at what Paul Volcker [chairman of the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan] did in 1979-1982. He forced a very difficult adjustment, but we got through it in just about two years. If we try to paper the crisis over, as the Japanese did with a similar asset bubble in the 1990s, it could drag on for a decade or more.

John Norton is editor of Our Sunday Visitor.