The $800 billion will be fine if it were all spent in a year. In my own back-of-the-envelope calculations my guess is that the stimulus package probably needed to be twice as big.
I understand the very difficult politics of all this in America. But I actually think they are taking too much the view that the private sector should be left to heal itself. The people who believe that's what we should do don't realize how damaged the private sector is and how long that healing would take and how incredibly painful the recession would be.
Gluck: The whole emphasis that has been paid to getting the toxic assets off the bank balance sheets-what do you think of that?
Wolf: I'm worried about it very much. It seems to rest on the view that what went wrong here was that the banks went overboard on a very specific subclass of bad assets. My view is they went overboard with credit in all directions. We're going to find, as this recession unfolds, bad debt emerging everywhere. You can't simply find a class of toxic assets, take them off the balance sheet and everything's fine. This focus on the toxic assets-because it's the politically convenient thing to do-is not going to solve the problem and is going to lose a lot of the momentum and credibility for the Obama administration.
Gluck: What three things in coming months would you look for if things are going to work out well?
Wolf: Passage of a bigger and effective stimulus package, No. 1. We're going to get a stimulus package, and I hope it works. But I would have liked to have seen it bigger. The second thing I would like to see are clear signs that the American administration has a package for the financial system which is sufficiently radical and comprehensive to make it absolutely plain to anybody that the financial system is viable and functioning under almost any conceivable circumstances. The third thing that I would like to see to be optimistic is a productive and effective meeting of the group of 20 developing countries in London in April in which they begin to emerge with a credible plan for demand expansion across the world and reform of the global financial system in support of it.
The pessimistic things are essentially the inverse of this. Namely, that it becomes obvious that the stimulus package is far too small and it's not working.
Gluck: When will that be obvious?
Wolf: It will probably be obvious in six months.
Gluck: A lot of people fear that the U.S. taking control of banks and nationalizing them is taking us down the wrong path. What do you think about this fear of compromising capitalism?