UCLA Economist: Fundamentals Looked 'Good' Before Bailout Talk Caused 'Panic'

     "Periods of crisis often beget bad policies," Lee E. Ohanian, an economist at the University of California, Los Angeles (UCLA) said. In an interview with Reason.tv, the professor stressed that six weeks ago the fundamentals of the economy looked “pretty good,” before bailout “rumors” caused “panic.”

     “What I mean by fundamentals are the amount of factories and office buildings and capital equipment we have in place, there’s no change in that. There is no change really in individuals’ interest in working. We’ve got the same work force right now we had six weeks ago. Productivity is about the same as it was perhaps even higher. All those fundamentals of the economy are the same,” said the professor.

     Ohanian said Gross Domestic Product growth over the last five to six quarters was “on average,” and productivity growth was “very high.”

     “We’ve never had a recession in the history of the United States where we had high productivity growth,” said the professor. He also said there was strength in the credit markets, consumer non-mortgage borrowing and business lending.

     “So, again you look at those numbers and say, ‘Ok, we’ve got some subprime problems but the big picture looks good.’”

     So what about those subprime problems?

     “Remember subprime mortgages are only 15 percent of the entire mortgage pool,” Ohanian said. “Of that 15 percent about half are paying on time, about 80 percent are paying either on time or within a few months of the due date. So, while there are issues associated with default. It’s not nearly as dire as many have claimed and the value of those obligations held to maturity will be higher in my opinion then some have claimed.”

     Ohanian criticized the handling of the credit crisis by Secretary of Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke because the government intervention caused people to panic.

     “Secretary Paulson and Chairman Bernanke when they first proposed the rescue plan told Congress, ‘If you don’t pass this and if you don’t pass this right away, we may not have an economy in a couple of days,” the professor said. "And those types of messages – very scary, frightening messages were issued sort of on a daily basis, by, including President Bush, and people hear this and people start to get scared.”

     It was obvious lenders had pulled back to see how the government bailout “plays out,” according to Ohanian.

     “When the rumor mill gets started about ‘This is going to cost $700 billion. The banking system is going down the drain. We’ve got to take over the banking system if we ever hope to be an economy again.’ It’s hard not to fall into that trap.” Ohanian explained.

     In 2004, Ohanian and another UCLA economist, studied the policies of President Franklin Roosevelt’s New Deal and determined those policies prolonged the Depression by seven years.

     Harold L. Cole and Ohanian blamed anti-free market measures for the slow recovery in an article published in the August 2004 issue of the Journal of Political Economy. The two asserted that Roosevelt thought excessive business competition led to low prices and wages, adding to the severity of the Depression.