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Dan Richards is president of Strategic Imperatives. He is a faculty member in the MBA program at the Rotman School at the University of Toronto. He also hosts a weekly conference call called Monday Morning Jump Start, which is about strategies for financial advisors. Advisors can see it He can be reached at

John Cochrane is professor of finance at the University of Chicago Booth School of Business, and incoming president of the American Finance Association. I spoke with him earlier this month at the annual meeting of the American Economics Association in Atlanta. Here are his views on key issues:

U.S. midterm outlook

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I think the basic forecast should be pretty optimistic. What happened to us was a very classic financial crisis and a flight to quality. Everyone wanted cash and government bonds and weren't spending on anything else.

That passed about six months ago. We are seeing financial markets return to normal. We are seeing all those dislocations - all that garbage in the pipes - disappear. Historically, after panics like this, the economy grows quite quickly and comes back faster than anyone expects. That's what I hope will happen and what should happen.


My biggest worry is stagflation. That is where I am much more pessimistic than everybody else. It is a much bigger possibility than the conventional wisdom of the panelists.

There comes a moment when inflation is out of the [U.S. Federal Reserve's] control. One of the big moments that will do that is when government debt poses an intolerable problem.

Remember, the Fed can only affect inflation with the background of a solvent healthy government that can easily raise taxes to pay off its debts. Once we get into a situation where we are worried about the U.S. government debt, inflation comes and there is nothing the Fed can do about that.

I don't think the Fed realizes this and I certainly don't think most of my colleagues realize this, because we are coming off of 50 years of U.S. history where debt was not causing a problem. Argentines understand otherwise. When your government is insolvent, you are going to have inflation and there is nothing the central bank can do about it.

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That inflation will not come with a boom. Many people assume you get rid of the slack before you can have inflation. [Fed chairman Ben]Bernanke says this - there is no danger of inflation because there is no slack in the economy. Well, in 1975 there was no slack in the economy either and we got inflation. That can happen again.

Risks going forward

There is a slight danger of additional defaults - Greece could go down and cause some more turmoil. But the big danger is that we are into astounding deficits and very large government debt.

The debt could lead to high and distorted taxes. And debt, taxes and micromanagement leads to slow growth for a while.

My other worry is mostly on policy - that's where the dangers are. The economy left alone should recover nicely.

Great Depression parallels

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Some of the things are the same. There was a great boom that resulted in a bust. There was a financial panic underlying it. There was a great increase in government regulation and attempts to fix it which may or may not have worked.

But note that there are some things that differ in important ways. All this financial innovation that everyone makes fun of actually made things much, much better than in the Great Depression. Those much maligned mortgage-backed securities actually helped.

In the Great Depression, if you defaulted on your mortgage, that mortgage was held by your bank in one city and that bank was funded by depositors. When that bank failed the depositors lost their money, and everybody in that city was in trouble. There was no one left in that city who knew how to make loans or who knew which houses were good. This was the key point of Mr. Bernanke's classic paper on the Great Depression.

Mortgage-backed securitization means that risk is shared around the world, which is what finance is supposed to do. That wave of bank failures that led to the collapse in the Depression didn't happen here because of the global financial system.

Another positive thing is that we learned our lesson from the Depression. The Fed has acted as an open spigot (if anything the criticism is that it has done too much) but it is not repeating the lesson of the Great Depression by allowing money supply and credit to collapse.

That is why we are not having another Great Depression.

Rise of protectionism

A rise in protectionism concerns me greatly. My reading of modern scholarship on the Great Depression is that what made it so long and so hard was largely government mishandling of things.

To date we haven't see protectionism as bad as it could be but there are signs of it. There is danger of too much meddling in the economy, but not yet anywhere to the degree of the Great Depression.

Advice for Obama

If I had to give President Barack Obama one piece of advice, it would be to stop trying to fix everything in such a panic. Sometimes the patient just needs time to heal. As he advocates evidence-based medicine, let's use evidence-based economic policy. When it comes to economic policy, all too often we spend trillions of dollars on a cocktail party story with precious little evidence behind it.

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