Knecht began by discussing the impact of the recent budgetary issues on students at UNR and NSHE institutions. The large endowment funds, operating funds, and pension plans for employees are all reliant on the rate of return on state and federal treasury bonds. A crisis at the state and/or federal level can have huge effects on the University's budget, even if the school manages its funds well.
Knecht continued to discuss the recession in 2008. He argued that despite the frenzy of finger-pointing, deregulation was not likely to be the cause of the recession, because there had been no meaningful deregulation initiatives during that period. His data showed that proposals for new financial regulation increased from 56 under Bill Clinton, to 62 under George W. Bush, to 149 under Barack Obama. He described the "policy-driven credit mania", spurred by federal incentives to invest with approved interest rates, and a regulatory system that protects financial gamblers; the culture of "too big to fail" that creates incentive for risky lending and borrowing. He also discussed in great detail what he considers to be the great folly of Fannie Mae and Freddie Mac: Fannie Mae, he said, degraded their lending standards to increase their market share in sub-prime loans while hiding the risk from investors. These companies provided taxpayer-backed liquidity and kept interest rates low with federal guarantees.
The mismanagement of mortgage-backed securities under Fannie & Freddie and supported by the SEC is far from the only issue facing the U.S. economy. As the economy receded, the velocity of money (V) decreased and the Federal Reserve system compensated by increasing the money supply (M1). The debt-to-GDP ratio increased substantially during this period. Mr. Knecht mentioned an ongoing friendly debate he has with UNR's Dr. Elliot Parker regarding the optimal debt-to-GDP ratio - Knecht says the optimal ratio is approximately 22%, but Parker argues the ratio should be 25-30%. The current ratio is ~36%, a number both can agree is too high and an obstruction to the growth of the economy.Other issues haunt the U.S. economy and stall growth. There is a serious problem with unemployment and underemployment -- inflation is "the new normal". The labor force is on the decline, with men exiting the labor pool and retiring early. The entry of women into the workforce has been slowing down, despite their increased presence in colleges and rates of graduation. The increase in unemployment benefits from 62 to 99 weeks, while protecting the jobless, also has the behavioral effect of discouraging their re-entry into the labor force. Mr. Knecht points to a deficit of 10.5 million jobs.
There is also a demographic issue facing most developed countries - "hyperaging", as Knecht describes it, happens when a country's population ages quickly and the ratio of people who are economic producers to dependents decreases substantially. The "baby boomer" generation, now entering retirement and drawing Social Security, according to Knecht, has left current young people in the United States with a poor legacy. The bankrupt healthcare system and social benefits program will have to be substantially down-sized soon, making current young people work well past the current retirement age and literally pay for the indiscretions of their parents' generation.
In the past, struggling economies have been saved by technological increases, business innovations, and growing trade. Mr. Knecht points to spending on education as being positively correlated with economic growth. In the face of an economic cataclysm, the United States will have to carefully examine its priorities and spend accordingly.
- Ariel Castro, University of Nevada, Reno Economics Club
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