Advice from an Economist Who Saw 1929

The Obama Administration should stop bailing out corporate disasters and abandon plans to move health care onto the backs of taxpayers.

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Tough talk from Anna Schwartz, a financial sage who has seen it all, having lived through the crash of 1929 and co-authored with Nobel laureate Milton Friedman the highly acclaimed financial bible A Monetary History of the United States (Princeton University Press, 1963).

The financial matriarch has carefully tracked recessions, studied boom-and-bust trends and spent her life — all 93 years — mastering the intricacies of the monetary system and banking world. She's worked as an economist with the National Bureau of Economic Research since 1941 and now serves as an adjunct professor at the Graduate Center of the City University of New York. She recently spoke with TIME contributing editor Janet Morrissey. (See pictures of the stock-market crash of 1929.)

TIME: Is the recession approaching a bottom?
Schwartz: I think that when the final date for the end of the recession is determined, it will be shown that it occurred sometime in the spring of this year. But I don't believe the recovery will be very substantial, and therefore it's hard to say the worst is behind us. A lot will depend on how consumers behave. Consumers have been saving and not spending, and the absence of a big surge of this spending is what will prevent the recovery from being robust. In addition, in so many industries there is overcapacity. More firms are selling cars than there is a demand for cars, so somehow that overcapacity will have to be eliminated.

What do you think of President Obama's fiscal stimulus package in helping to turn the economy around?
The bill that provided something like $800 billion for spending on government projects was supposed to make people willing to spend their own money. But that hasn't happened. The implicit belief of the Obama Administration is that you needed fiscal stimulus [i.e., more government spending], and that's why they passed this enormous stimulus bill. But from my observation of how, historically, expansions have come to an end and how recovery has happened, it's always in terms of monetary stimulus. And that has not been the program of this administration.

By monetary stimulus, do you mean the Fed needs to print more money?
An increase in the money supply has historically always motivated people to spend and end a recession. And I don't know if there's any evidence that fiscal stimulus has the same effect on people's habits. All that Obama's fiscal stimulus bill has achieved is to put an enormous fiscal deficit on the Federal Government. (See pictures of the dangers of printing money.)

Do you think his PPIP [public-private-investment program] is a smart move in getting the toxic assets off the balance sheets of banks?
The premise that private investors would purchase these toxic assets on the assumption that as time passes, the value of these toxic assets will improve — I don't believe that. What the government is trying to do is to induce private purchase of these assets by subsidizing them.

And you don't agree with that?
I don't, no. I think these assets should be purged, and the only way to purge them is for the government to take them over and to relieve private holders [the banks] of these assets.

Should the government be bailing out troubled banks or letting them fail?
I'm opposed to the government bailing out firms that should be shut down because they are basically insolvent. A firm that's insolvent should be encouraged to file for bankruptcy and rid the market of an institution that's using resources that could be better used by productive firms.

Watch TIME's video of Peter Schiff trash-talking the markets.

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