Martin Feldstein, one of the US’s most respected conservative economists and a member of Barack Obama’s Economic Recovery Advisory Board, was in Mumbai this week on the initiative of Canara Robeco Asset Management Company.
Feldstein, George F Baker Professor of Economics Harvard University and President Emeritus of the National Bureau of Economics Research, spoke to HT. Excerpts:
What’s your opinion of Obama’s move last week, just before Wall Street announces bonuses, to charge a special levy on big financial institutions’ assets?
There is a lot of popular resentment in the US about the state of the economy and the government having helped the banks. There is a failure to understand that if banks are in trouble and can’t lend, then the rest of the economy will be in trouble.
To try and deal with this, Obama has announced this punishment. But it is largely a political gesture. The amount, $100 billion over 10 years, certainly sounds very large, but it is not, relative to banks’ assets and profits.
Should the regulatory system be overhauled?
There’s little doubt that in a year, banks will have higher capital requirements. What worries them is that if you say they must have more capital, they can’t easily get it.
They may cut back on economic activity, which is the opposite of what [we] need. So they [policy makers] must approach it in a slow way. This is a problem that hurts the small, local banks [not just the big money-centre ones].
The US has 8,000 banks, many of which are at high risk because of real estate and other loans on their books and are not in a position to raise more capital.
There is a danger they would cut back on lending even more.