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By Ben Johnson, CFA | 10-03-2013 12:00 PM

Goolsbee: We Need More Investment

The basic engine of U.S. economic prosperity has been the economy's tendency to innovate, which has not changed, and investors need to continue working past fears of the financial crisis, says economics professor Austan Goolsbee.

Ben Johnson: Hi. I’m Ben Johnson, director of passive funds research with Morningstar. I’m here on the sidelines of our ETF Invest 2013 Conference. Today, I’m joined by Austan Goolsbee. Austan was the former chair of President Obama's Council of Economic Advisers, and he's currently a professor of economics just down the street here at the University of Chicago.

Austan, thank you so much for joining.

Austan Goolsbee: Thanks for having me.

Johnson: Now, you really had a front-row seat to the very worst of the financial crisis, being in the position you were in.

Goolsbee: It was one of those front-row seats you don't want, where the guy is spitting on you from the stage, but that was a crazy moment. For all the struggles and troubles to get the growth rate up in the country, it certainly feels better in markets and in the economy than it was back then.

Johnson: But given your broad role and, I mean, you were even on the Detroit automotive industry task force, what about what you saw then and what you were planning for then has panned out sort of as expected, and what now a few years removed has panned out in ways you could have never imagined?

Goolsbee: That's an important and deep question. There’s several different areas. I would say, on the financial side, we've learned that if you get into a crisis, precommitting to recapitalize the banks doing a full-blown stress test, where you open the books and show the market here's where the holes are and here's where they're going to be filled, I think most analysts agree that's how you should do it; have the government take warrants. At the time, everybody was nervous that it wouldn't work. That hadn't really been fully tried before.

So that one was a surprise to the upside; not that it worked at all, but that at least on the bank side the Troubled Asset Relief Program ended up getting paid back in full. Back at that time there were a lot of people saying $700 billion, it might be $1 trillion or more. If you look at the international evidence of big financial crises, they end up costing the governments somewhere between 5% and 10% of GDP on average. So that the banks paid back the money was great. I'm extremely happy they did that.

I think the other surprise to the upside was in the discussions about the rescue of the auto industry, nobody knew whether demand was going to come back strong enough that we would be able to keep these companies afloat long enough that the rising tide will lift them up. That proved the demand came back stronger than people even anticipated. So, you've seen with the announcements at GM, at Chrysler that they've kind of matched back to fore that the auto industry is coming back. So, both of those were positive.

I'd say on the negative side, we did not know at the time when trying to come up with the stimulus, what the nature of the downturn was. Is it a long-lived, extended, slow growth kind of a recovery, or will it be more traditional? We had a very sharp downturn, therefore we'll have a very sharp upswing. That debate took place in the government and the stimulus itself and many of the government actions were on both sides or every side of that. Unfortunately, it's proved in both the U.S. and the rest of the world to be the long, extended painful type of recovery. So we're still living with those issues.

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