EDITOR'S note: Despite renewed GDP growth and other positive signs, the US isn't out of the woods, says Wharton finance professor Franklin Allen. The following is an edited transcript of the conversation between Allen and Knowledge@Wharton.

Q: You mentioned the risk of a "double dip." What could drive us back into trouble?

A: We are in such an interdependent world that what happens in the rest of the world is going to be very important for the US. In Asia, there is good news and bad news. The good news is they seem to be doing okay. The bad news is they are having problems with bubbles.

For example, in Singapore in the third quarter, property prices went up 16 percent, which is a staggering amount given the state of the world economy and that Singapore's economy was quite badly affected by the financial crisis.

Central banks have just gone wild in terms of the amount of credit and liquidity they are providing. This has stopped the crisis much as it did in 2003 and 2004. But it is sowing seeds for a future crisis, and that's the real worry.

Q: The Fed seems to be winding down some of the programs it put into effect - buying bonds and that sort of thing. Is it the right time for such a move?

A: My view is that they should not have done it in the first place. In essence, it's too late. But there will be an issue when it starts removing the programs and presumably, at some point, raises interest rates. That is going to (show) just how strong the financial system is.

At the moment, not only are (Fed) officials effectively supporting the system in the ways they did during the crisis, but by having such low interest rates, they are also effectively providing a huge subsidy, particularly to the banks.

Q: Another effect of the low interest rates is that mortgage rates are extraordinarily low. They are at near record lows. Is the housing market a key to the US recovery?

A: This is part of the bubbles issue. The Fed put rates so low that it helped the housing market a lot, and prices have stopped going down, and in some cases have started going up. But the question is whether this is sustainable. When rates go up again, what is going to happen? That's why we might see a double dip.

Q: One of the big issues not on the front burner recently, but lingering, is the deficit. It is enormous. How important is it to wrestle the deficit down?

A: We still have all the long-term problems of the baby boom generation (including) medical expenses and Social Security. Social Security is probably curable by a few fixes. Medical expenses are going to be a big problem and are now compounded with all the problems of the recession, low tax revenues and so forth. We need to start worrying about that.

As interest rates go up, it will be much more costly for the government to fund these. And because our debt is going up to levels near 100 percent of GDP in a fairly short time, every percent on the interest rate means another percent of GDP we have to pay out in interest.

Q: The Fed Chairman Ben Bernanke said a few days ago the cause of the crisis had more to do with lax regulation than the Fed's persistently low interest rate policy from the early part of the decade. Do you agree?

A: I don't agree with him. The Fed fights every action to avert blame for the crisis because a lot of things are happening in Congress that would take responsibilities and power away from it, if one takes that view.

It is culpable both ways, because it was overseeing many of the banks that did the mortgage underwriting and so on. It has a difficult one to argue there. Low interest rates were the primary problem. The main evidence is that it wasn't just the US that had these problems.

Spain had very good banking regulation and it didn't have irresponsible mortgages in the sense of low underwriting standards. Yet it had the same kinds of problems, or even worse because the bubble was bigger there.

Although the European Central Bank didn't set low interest rates in an absolute sense, it did in a relative sense. The interest rates there were too low given the huge boom going on. If you look at other parts of the world and you look back at history, one can see low interest rates are a big part of bubbles.

Q: There have been a number of stories recently about the rebound in China. It seems to have emerged from the downturn faster and in a more healthy way than many other countries. Do you see it that way and why?

A: China has two huge advantages. The first is it is in a very strong fiscal position. It has relatively low government debt compared to most other large economies. This gives it the power to borrow and spend large amounts.

The second is that it still has tremendous control over the economy. It owns a large part of industry, banks and many other things.

This means it can stimulate the economy easily. One of the issues there though is property prices in Beijing and Shanghai going up at a fairly fast pace. Are they causing a bubble? And if it bursts, is the country going to have a problem?

It needs to move away from just building infrastructure such as roads, bridges and those things needed in many parts of the country. It needs to slow down slightly on that and worry more about building human infrastructure in terms of education, health and those kinds of things, which is somewhat below par in many parts of China.

Q: Are there lessons the West can learn from the way the Chinese responded to the downturn?

A: One reason China did so well is that it owns big banks and was able to direct them, which you can't really do in a privately owned financial system. I don't think we should replicate the Chinese system, but maybe move a little bit towards that.

Q: Looking at the rest of Asia, do you see things getting better or worse?

A: It is very mixed. (South) Korea is doing very well. It has among the best of all countries to have survived the crisis - especially given that it has an export profile like Japan and Germany have, it hasn't been nearly as badly hit.

Australia is doing very well. It already raised interest rates. It is benefiting from how China is doing and the big infrastructure projects China is undertaking.

Some of the other countries have long-running problems. The Philippines is not doing so well. But by and large, Asia is doing okay and hopefully it will continue to do okay.

(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. The views are its own. Shanghai Daily condensed the article.)