Unsure of initial stimulus helping: Richard Burdekin

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It has been little over a month since the Obama administration took over. The latest news is that the government may hike its stake in Citi Group to 40%. There are quite a few influential voices in America now questioning the logic of throwing more good money after bad.

 

Speaking on the issue, Richard Burdekin, Professor of Economics at Claremont McKenna College, said he is not so sure about the initial stimulus package being all that helpful in terms of really fixing the problem. "However, it really doesn't go far enough and there is an increasing number of economists saying that some sort of nationalization for certain big banks seem pretty much inevitable."

 

Also read: US House of Representatives approves $819 bn stimulus plan

 

Here is a verbatim transcript of the exclusive interview with Richard Burdekin on CNBC-TV18. Also watch the accompanying video.   

 

Q: What is your response on what you think of the three big efforts that the Obama administration has made in the last 30-days to help the American economy revive. We had the bank bailout, albeit missing in detail, the USD 800 billion economic stimulus plan and then last week the housing mortgage subsidy plan that also came out?

 

A: The banks and the housing market are the key, probably, in the order. I am not so sure about the initial stimulus package being all that helpful in terms of really fixing the problem. With the banks, some of the elements of the plan such as selling-off assets rather than trying to have the government just fix the price for themmake a lot of sense. However, it really doesn't go far enough and there is an increasing number of economists saying that some sort of nationalization for certain big banks seem pretty much inevitable.

 

That's probably where that's going to go and then the housing market--I would like the idea of allowing some workouts of people who are upside down on the mortgages that is more than their houses' worth. Giving people like that a chance to refinance perhaps at lower rates to have a smaller loan based upon low value of the house is quite sensible and if you don't do that then the lenders lose out any way because they end up foreclosing. They probably don't get the market value even when you lower market value for the house. So, I like that part of the housing stat, unless enamored by the fact that this seems to be a provision whereby the mortgage rate is going to be geared to be income of the borrower.

 

So the idea that the loan balance shouldn't be more than the certain percentage of household income sounds like different rates depending upon different income levels and that doesn't seem a very wise way to go as far as I could see. There will be more foreclosures but at least somewhat of a step in the right direction.       

 

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