Tags: recession

Rohatyn: U.S. Can Avoid Recession

Wednesday, 23 Jul 2008 01:40 PM

Financier Felix Rohatyn is calling for a broad, government-backed financing plan to stimulate the U.S. economy that focuses on "long-term investment," rather than short-term stimulus.

Rohatyn, a senior adviser to Lehman Brothers, writes in the Financial Times that the "implosion" of the financial system caused by the declining housing market and increasing oil prices have created "cause for genuine concern over the U.S. economy's prospects."

In February, the White House and Congress approved a $200-billion temporary economic stimulus. "But this seems likely to fall short of bringing about a turnaround," Rohatyn notes.

Now, the government is considering a second stimulus.

But, Rohatyn said, the government should take other steps to secure the economic future of the U.S.

"Senators Christopher Dodd and Chuck Hagel have submitted a bill providing for the creation of a national infrastructure bank, which would provide assistance to state and local governments to inc¬rease investment in infrastructure," writes Rohatyn.

"With an initial capital base of $60 billion and the ability to insure the bonds of state and local governments, provide targeted and precise subsidies, and issue its own 30- to 50-year bonds, the bank could easily provide $250 billion of new capital to invest in local infrastructure over five years, which would also create several million new jobs, just as a domestic recession threatens to gain momentum."

Additionally, Rohatyn writes, the federal government should initiate a revenue-sharing program of as much as an additional $250 billion to state and local governments to maintain service levels.

"Assistance to local schools should be a priority. Alternatively, some of this amount could be used to fund a partial Social Security tax holiday for employers, in order to maintain job creation," the financier believes.

The Treasury Department's proposal to save Fannie Mae and Freddie Mac, meantime, is "a good start" and may well solve the problem.

Rohatyn is renowned for his role in preventing the bankruptcy of New York City in the 1970s.

"But we must be prepared to take further steps if needed," he writes.

One option Rohatyn suggests would be to design terms on which the Treasury would create certificates that would be swapped for conforming mortgage assets up to a predetermined percentage of banks' capitalization, together with a schedule for swapping these certificates back to the Treasury over the next three to five years.

"This would give banks breathing space to meet capital standards while the housing market stabilized. The prospect for government participation in any upside could parallel the Chrysler bailout that worked quite successfully almost 30 years ago," he says.

Rohatyn's call for more government intervention in the economy is somewhat controversial.

San Francisco area business and economics consultant Nan Andrews Amish, who works with major Fortune 500 clients, tells Moneynews that "we have already artificially extended the positive economy pretty much as long as we can. There are not too many tools left."

Government intervention in the economy should be limited to the techniques already available, according to another leading expert. "Oil at $135 a barrel is driving the inflationary cycle, which means at some point the Fed will have to raise interest rates," Dr. Herb London, president, Hudson Institute, and professor emeritus at New York University, tells Moneynews.

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Financier Felix Rohatyn is calling for a broad, government-backed financing plan to stimulate the U.S. economy that focuses on "long-term investment," rather than short-term stimulus. Rohatyn, a senior adviser to Lehman Brothers, writes in the Financial Times that the...
recession
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2008-40-23
Wednesday, 23 Jul 2008 01:40 PM
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