Untangling What's Next For The U.S. Economy

Gold prices are up, while oil prices, interest rates and global markets are down. Louise Story of the New York Times explains how the S&P downgrade is affecting the U.S. economy. Christina Romer, President Barack Obama's first Chair of the Council of Economic Advisors, and economist Russell Roberts also weigh in.

NEAL CONAN, host: President Obama in a statement at the White House, reassuring the American public, and indeed, the people around the world, that the United States is still a good investment, the American economy is still strong.

He quoted Warren Buffett, the famous investor, saying if it was possible to have a quadruple-A rating, that is what he would give the United States. However, the president also said that does not mean we do not have real problems.

He also spoke about the spirit of compromise and common sense that he said must be summoned to respond to this crisis that has always been the hallmark of the American people - their ability to rise to a situation, to work out their differences through the American political process. Something that he admitted skeptics would have some questions about in the current atmosphere, the skepticism generated by the difficulties of the debate over the debt ceiling and the continuing crisis that is generated on Wall Street.

NPR senior Washington editor Ron Elving is here with us in the studio. And Ron, the president, well, given the opportunity, he's made a statement calling for both sides to work together again. This was not a partisan speech, I didn't think.

RON ELVING: No, he did not attack the ratings agency as some others in the administration have done in recent days. He did at some point refer to some ratings agency, which could of course be taken to have had a certain tone. He also did note that Moody's and Fitch have not downgraded the United States as S&P has, and he did quote Warren Buffett, whose rather timely remark this morning was that if it were up to him, he'd give the United States a quadruple-A rating, which is a nice line and which I'm sure the president appreciated when it was given.

He did not directly attack S&P, but he did suggest that they're looking at the wrong thing and that the underlying strength of the United States is certainly enough to put us, more or less permanently, as we have always been, in a special category whereby it is almost cheeky, really, of someone to come along and say well because you're having some sort of a temporary budget problem or what could be interpreted as a long-term budget problem, we're going to downgrade your general creditworthiness.

He also said that there were many things that were out there that could solve at least the immediate midterm, and even long-term, aspects of the United States' fiscal problem and that some of those ideas had been shared by himself and Speaker Boehner.

As you said, it was not a directly partisan speech. He didn't come out, he didn't mention the Tea Party, he didn't say the Republicans were recalcitrant. He said there were lots of good ideas out there, we could have gotten this done, and we're going to renew our efforts to do so. I'll make some more proposals, they'll make some more proposals, we can make this a renewed commitment moment, as opposed to some sort of a catastrophe.

CONAN: Marilyn Geewax, NPR senior business editor, if the president was hoping the markets might respond immediately to his cheerleading, well, Dow Jones Industrial Average still down 395 points.

MARILYN GEEWAX: Well, it was sort of a fireside chat, except it's 100 degrees outside. So maybe it wasn't a fireside chat. He is trying to send out that calm vibe that - he does have a certain cool or calm collectedness that he doesn't seem to get too high or too low. And I think that's what he's trying to convey to markets right now.

There's an awful lot of just volatility out there, and if he had a message, I think it was that we're, as Warren Buffett says, a quadruple A country. We still have all these strengths and underlying entrepreneurial energies that we can still revive our economy. And I think he just wanted to not make things worse.

Well, you know, since he spoke, the Dow is still hovering at around 400, down 400. So I don't think it had any immediate impact, that's for sure. But you never know how these things play out.

People who are work today, maybe they'll watch the evening news, or they'll see some snippets of this or hear parts of it, and I think he just needed to have a presence out there for the markets to say we're going to calm things down, and it'll get better.

CONAN: Ari - also with us is Bruce Auster, NPR senior national security editor. And at the end of his remarks, the president, as expected, also referred to the loss of 30 Americans and seven Afghan troops in a helicopter crash over the weekend, saying a stark reminder of the risks our men and women in the armed forces take every single day.

BRUCE AUSTER: That's right. And the president had a difficult challenge today, because he was addressing the situation, the economy, and yet he had to - he could not avoid acknowledging and honoring the 30 people who died, the 23 - the 30 Americans who died in this helicopter crash.

And he did what I thought was an interesting thing, because I think he actually tried to thematically link what he was trying to talk about on the economy - which is the idea of working together and finding common ground - with the sacrifice that these troops made when they gave their lives over the weekend.

He talked about how each of these service members comes from a different background, from a different place, from a different set of beliefs, and yet in the end, he said, they served their nation as a team.

And he tried to, I think, use that to indicate that that's what he's looking for for the rest of the country. You know, as he put it, you know, an America that reflects their courage and sense of common purpose - were his words.

And so I think that was his effort to bridge what was primarily a discussion about the economy, today, with an effort to honor those who died and who died coming together to serve their nation.

CONAN: Bruce Auster, NPR senior - is NPR's national security editor. Thanks very much for your time today.

AUSTER: Thank you.

CONAN: Also our thanks to Marilyn Geewax, NPR's senior business editor, who joined us in the studio, as well. Thanks very much.

GEEWAX: You're welcome.

CONAN: And Ron Elving, NPR senior Washington editor. We're going to let them get back to work on the stories that you'll be hearing later today as coverage continues on NPR News.

President Obama just wrapped up a statement from the White House in which he sought to reassure Americans and the world that the U.S. economy can be relied upon.

Meanwhile, downgrades continue. Rating agency Standard and Poor's downgraded lenders Fannie Mae and Freddie Mac this morning, along with 10 federal home-loan banks. Some state and municipal bonds might be next.

Global stock markets dropped between two and four percent. Wall Street looks to be following suit. At last check, Wall Street's Dow Jones Industrial Average down 426 points. Interest rates and the price of oil are also down. The price of gold is at a record high.

Some economy watchers warn of dire times ahead and predict another recession. Others say, well, maybe there's some actually good that might come of this. There are a lot of moving parts. So what don't you understand? Give us a call, 800-989-8255. Email us, talk@npr.org. You can also join the conversation on our website. Go to npr.org. Click on TALK OF THE NATION.

In a few minutes, we're going to speak with President Obama's first chair of the Council of Economic Advisors, Christina Romer. We'll also be joined by Hoover Institution economist Russell Roberts. But we turn now to New York Times business reporter Louise Story, who joins us from our bureau in New York. Nice to have you back with us.

LOUISE STORY: Nice to be here.

CONAN: And as you look at the scale of losses today, this seems to be on about the same scale as we saw earlier in Asian and European markets.

STORY: Right, and this is the worst slump we've seen since the fall of 2008. That's why you have a lot of people talking about, you know, are we heading toward some kind of Lehman-like event. You know, that was the investment bank that failed and kicked off the financial crisis - because we've wiped out so much value, just in these last several days.

The U.S. stock market has wiped out $1.94 trillion of value. So that's money that was in people's 401(k)s and in endowment, investment funds. That really is money that affects everyone out there.

CONAN: So these are real losses. This is not just paper we're talking about.

STORY: Absolutely it's not just paper, because a lot of people have their savings in the stock market. And as the baby boomer generation needs to retire in the next few years, a lot of them were looking to the stock market for their retirement, especially because their homes are now worth a lot less than they had hoped they would be.

CONAN: And as we look at these - this, the effect from the downgrade of just one of the big three rating agencies; the others, Moody's said today they've re-looked at their numbers and say no, no, no, triple-A, that's still good for us.

STORY: Moody's has been saying that since last week. They issued a report explaining that today. Fitch has not absolutely confirmed their rating. They're taking throughout this month to evaluate it. But both Moody's and Fitch have said that if they don't see improvements and follow-through on the plan to cut spending and bring the budget in order in the U.S., that they might downgrade them.

So Moody's has the U.S. on a negative watch. Even though it's confirmed triple-A, they're watching.

CONAN: So why just one of these agencies, Standard and Poor's, the best known, but that's outside of Wall Street. The other two are pretty big there.

STORY: Oh, they're all three very big. And, you know, there are many countries out there where they might have triple-A from two of these rating agencies but not from all three. The question is, in the financial markets and in the eye of the public, does it matter if you have all three? Is two of three good enough?

You know, we're seeing the stock market really spiral. Is it spiraling today because of the S&P downgrade, or is it falling because of the really bad economic data that we've had come out in the last couple weeks, showing that the economy is not growing as quickly as we hoped it would.

And, you know, the problem is you can't read the mind of the stock market. So it's hard to know why it's falling.

CONAN: And curiously, you might have thought the interest, the price for the United States to borrow money, might be going up if its credit was downgraded. But the interest rates on T-bonds are going down.

STORY: That is what is so amazing. It's kind of opposite day in the financial markets because normally, you're right. If people thought treasuries are not worth anything because the U.S. has been downgraded, and treasuries are risky, you would think that they would sell treasuries. And when people sell treasury bonds, that makes the interest the government has to pay to convince people to buy them go up.

But instead, what's happening is people are buying treasuries. They're rushing in there. And so we're seeing record lows on the borrowing costs. The two-year treasury dropped to a record low for the government.

The answer for why they're going to treasuries is because the stock market has always been perceived as being more risky than the treasury market, and so people are running away from the stock market. They've got to go somewhere. There is gold, but there is about nowhere else.

And that's one of the reasons that a lot of people think the stock selling may be because of the economy. Because if it was only because of fears about the U.S. government, you would think people would not buy the treasuries, but if it's because of the economy, the - another recession, perhaps, or just a bad recovery will really hurt corporate stocks out there and companies' earnings.

CONAN: Gold you mentioned now at record high prices, over $1,700 an ounce. But also some people are noting the drop in the price of oil and taking that as an indication that people are worried about demand going down, that there's going to be a global economic turndown, and people aren't going to be buying as much oil.

STORY: That's right. So oil is very much an economic indicator because when the economy is booming, you know, people are driving more, they're flying more, factories are building more things, and a lot of those activities take oil. And during recessions, oil prices typically fall.

You know, if you think about it, just earlier this year, back in the winter and spring, we saw oil prices going back up again, over $100 a barrel, and that was a sign, a lot of people thought, that our economy was improving. So the fact that it's falling again now does seem to people that it's a bad economic indicator.

CONAN: And we should indicate that this is what we're reading today. It may be different tomorrow. Things can turn around, but...

STORY: Well, you know, it may be different an hour from now. This volatility is really what's crazy here. You know, you watch the stock ticker, and it's soaring up for five minutes on good news, and then it's just collapsing. So this could be different an hour from now.

CONAN: So we have to be careful not to read too much into numbers that are inherently volatile, but if you see markets around the world dropping between two and four percent, that's a moment of some significance.

STORY: Especially given that it's been happening day after day after day. And it seems to show no end at this point.

CONAN: We're talking with Louise Story, a business reporter for the New York Times, at our bureau in New York City. If you have questions about what's going on, there's a lot of moving parts, give us a call, 800-989-8255. Email us, talk@npr.org. Let's see if we can get a caller in. This is Steven(ph), Steven with us from Salt Lake City.

STEVEN: Yes, my question is: How has the process of increasing the debt ceiling affected - does that have anything to do with the downgrading thing? Is it because we had a hard time making up our minds, both sides of the aisle? And if that is the case, who takes responsibility for what we have to - because this is going to mean a lot of loss of income in investments for a lot of us.

CONAN: The president in his statement just a few minutes ago suggested that the long debate over the debt ceiling, Louise Story, that that long debate played into people's fears about the debt problem.

STORY: And, you know, the president was taking a line from Standard and Poor's, the rating agency, because in their ratings downgrade on Friday, they said a big part of the reason they were downgraded the United States lower than triple-A was because they had watched the process with the debt limit debate, they had seen that there is gridlock in Washington, and they fear that that kind of gridlock will persist and that the country will not make adequate process on its budget savings.

So they said it was directly related to their ratings downgrade.

CONAN: The president called for common sense and the ability to compromise. He hoped the supercommittee that he created to come up with new ideas for the long-term debt problem will be able to reach consensus quickly and that Washington can move ahead. He also acknowledged there is some skepticism, given the acrimony of that debt ceiling debate, that they may be able to do just that.

We're going to continue with our special coverage in just a moment. We're talking with Louise Story, a business reporter for the New York Times. After a short break, Christina Romer, the former chair of President Obama's Council of Economic Advisors, will join us. Stay with us. I'm Neal Conan. This is special coverage from NPR News.

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CONAN: This is special coverage from NPR News. I'm Neal Conan in Washington. About 15 minutes ago, President Obama wrapped up a statement from the White House about the downgrade of U.S. debt. He sought to reassure the American people and global investors that whatever the rating, the U.S. economy remains strong.

President BARACK OBAMA: There will always be economic factors that we can't control: earthquakes, spikes in oil prices, slowdowns in other parts of the world. But how we respond to those tests - that's entirely up to us. Markets will rise and fall, but this is the United States of America, and no matter what some agency may say, we have always been and always will be a triple-A country.

CONAN: The president also stated unequivocally that he knows what the problem is and how to fix it.

Pres. OBAMA: Our problems are eminently solvable, and we know what we have to do to solve them. With respect to debt, our problem is not confidence in our credit. The markets continue to reaffirm our credit as among the world's safest. Our challenge is the need to tackle our deficits over the long term.

CONAN: The president from - speaking at the State Dining Room of the White House earlier today. What part of this story are you having a difficult time understanding? 800-989-8255. Email us, talk@npr.org. Louise Story, business reporter for the New York Times, is with us. And joining us now from a studio at the University of California at Berkeley, where she's now a professor of economics, is Christina Romer, President Obama's first chair of his Council of Economic Advisors, and it's nice to have you with us today.

CHRISTINA ROMER: It's lovely to be with you.

CONAN: And as you look at the situation, are you surprised by the extent of the drop on Wall Street?

ROMER: I have to say I am. I think we always knew that there might be some reaction today after the downgrade announcement. But, you know, the fundamentals behind that downgrade I think have been well-known. We all knew the economic numbers were not looking very good the last several weeks or actually last several months.

We know our long-run budget situation is terrible, and we know there's a lot of political acrimony in Washington. And so I certainly didn't think there was a whole lot of news in what Standard and Poor's did. But clearly, maybe seeing it written on paper has had an effect on what markets are doing and thinking.

CONAN: And we've been warning ourselves all day not to get too caught up in the numbers, but 476 points down, 479 points down at this moment. That's over four percent. That's sort of on the high side of the losses around the world today. Is this going to be, Christina Romer, a sobering correctional moment for Washington's problems, or are things just going to continue to be in gridlock, do you think?

ROMER: So, I mean, this is certainly going to be certainly another shock to the economy, and certainly the last thing that we needed was something else to be unsettling the economy and taking a toll on growth.

You know, I certainly do hope that it does help to break some of the logjam in Washington and see if they can do better in dealing with our economic problems. I think the thing I'm most worried about, one reaction that would be terrible is if Congress rushed back and said what we really need is, you know, more fiscal austerity right now, let's really get that deficit down immediately because I can think of nothing that would be harder on the economy, worse even for our long-run deficit projections is if we suddenly went to a very extreme austerity.

I think that would be terrible for growth and make all of our problems worse. So, I hope that they - that it motivates people to deal with this sensibly, not to rush to some imprudent solution.

CONAN: In that statement the president made just a few minutes ago, he spoke of, well, along the lines of what he described as the grand bargain that he'd been working with with the speaker of the House, John Boehner. Of course, that did not come off. But he said the solution is not the budget cuts that you were talking about, but rather increased revenues in the form of asking the wealthiest among us, and corporations, to pay a little bit more and modest adjustments, as he described it, to entitlements such as Social Security and Medicare and Medicaid. Is that something you would endorse?

ROMER: Absolutely. No, I think the key thing in dealing with our long-run budget problems, both those two things the president mentioned, entitlement reform and additional revenues, just simply have to be on the table. And I think if you surveyed economists, you'd find widespread agreement on that point.

I think, you know, one of the things, last spring 10 former CEA chairs - Council of Economic Advisor chairs - from both Republican and Democratic administrations endorsed the recommendations of the bipartisan fiscal commission that the president had set up.

And that fiscal commission had additional revenues in terms of tax reform. It absolutely took on some sensible reform to our entitlement programs. And it cut discretionary spending. And so far, we've done the last one of those. We've proposed a lot of cuts in discretionary spending but not the other two pieces that absolutely have to be a part of any really lasting solution.

CONAN: Well, let's survey one economist. Joining us now from a studio at Stanford University, economist Russell Roberts, a research fellow at Stanford's Hoover Institution and joins us from a studio there. Nice to speak with you again.

RUSSELL ROBERTS: Good to be with you, Neal.

CONAN: And would you be among those economists who would endorse that broad outline?

ROBERTS: Well, it depends what the ratios are, of course. I just want to mention one thing. Christina talked about the cuts in discretionary spending. We haven't really made any that are significant, and I think that's part of what we see markets reacting to, although it's hard to know.

But certainly, the fiscal picture after the debt ceiling agreement is business as usual. And I think the president's speech is business as usual, and I think we're at a time where business as usual is unacceptable. We need some change.

We're spending enormous amounts of money. We're borrowing that money over a trillion dollars a year. We've been doing it now for three or four years running. It's time to act like grownups and live within our means, maybe not tomorrow.

I accept Christina's point that tomorrow is not a good idea to eliminate the debt, but it might be the day after tomorrow or next year, and I think it's time for some political and economic courage, and it's missing from Washington on both sides of the aisle.

CONAN: The Dow Jones Industrial Average bounced below 600 points just a moment ago. It's recovered slightly, 574 at the moment, but these are about five percent losses and very sobering numbers indeed.

As you look ahead, Russ Roberts, to the kinds of solutions that we're going to be forced to come up with, well, is forced to come up with a fair way to say it, or is it the same kind of gridlock that the president announced, that the Standard and Poor's statement on Friday night described? Is that - should this focus finds?

ROBERTS: Well, I think one thing we maybe ought to do is get off the air, Neal, because every time you mention what the Dow has done...

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ROBERTS: And as the program continues, it seems to go lower and lower. There - causation and correlation are often confused, but it's a little frightening. I think the long-run issues that we've talked about already with respect to entitlements, we can debate whether there should be a mix of spending or - spending cuts or tax increases.

But I think the thing that we really have to do is address the problem. It's not enough for the president to say we need together. That's pabulum. It doesn't advance the ball down the field. The president needs to lead. He needs to put a proposal on the table or a budget on the table.

The last budget he put on the table, last February, was business as usual, $47 trillion of spending over the next 10 years. That makes the problem worse. So I think it's time for some bold statements from the president, ideally, and if the Republicans can nominate someone soon, that'll be good from whoever that person ends up being about what the picture of future entitlement reform has to be.

You asked whether it's forced our hand. What's forcing our hand are demographic changes we can't avoid. The programs, as currently designed, are not sustainable. So we need a mix of spending cuts or programmatic changes or tax increases to make it happen.

It'd be great if those changes were proposed. They're not going to be the same proposals from the Republicans and the Democrats. And let's have a national discussion about where we want to go with Social Security and Medicare.

It's a huge political quagmire that I understand no one wants to touch, and every minute that they don't touch it, things are getting worse, and it's ugly.

CONAN: Let's see if we can get some callers in on the conversation. We'll start with Hillary(ph). Hillary's on the line with us from Haley in Idaho.

HILLARY: Hi, yes, thanks. My question is how long we're going to be stuck with this new rating and when we might have a chance to bump it up again.

CONAN: Louise Story there in New York from the New York Times, can you help us out here?

STORY: You know, there is no fixed timeline. In fact, the rating agencies operate under pretty secret methods. You know, they don't really tell you exactly when they would bump it up. But all of the rating agencies have said that getting the larger budgetary situation under control is important to them, and so, you know, if you see the budget come into order, S&P has specifically said they want to see $4 trillion of cuts or corrections in the budget over the next 10 years.

And so if you saw Washington arrive at that over time and the economy improved, then S&P very well might come back and change it again. But they don't want to be flip-flopping it every week. So they're going to probably wait a little bit longer to make sure that things look good before they would upgrade it.

CONAN: All right, Hillary, thanks very much for the call. Let's see if we can go next to - this is Larry(ph), Larry with us from Vancouver, Washington.

LARRY: Hello. Thanks for taking my call. My question would be - is the history of the rating agencies, to me, in light of Warren Buffett's comment and the fact that the rating agencies were rating our investment banking corporations, et cetera, that at triple A within a month of them requiring bail out - and I know there's a lot of details there that I could not go into - but, anyway, I just wonder what the credibility is of these rating agencies at this point.

CONAN: Christina Romer, these are, as Larry points out, the folks who brought you Enron.

ROMER: Well, they're also right. They're self-appointed, right? So they - the only reason anyone listens to them is because they, oh, because of their track record, or whatever. And I think, as Larry pointed out, their track record's not always that great. You know, I think that's why a lot of economists say, you know, much more important to look at the market test. And the market test is whether our bonds, what yield are they trading at, and it's currently down, not up. And certainly, it's conveying the sense that the people actually putting money on the line think the United States government is a very good bet for paying off their debts.

Actually, I want to come back to something Russ Roberts said about how the president needs to lead. I think one of things that's really important when the Gang of Six senators - at the end of the breakdown of the deficit negotiations - came out with a proposal that did very serious deficit reduction, that had some entitlement reforms, that had some additional revenues, the president was about the first person in line to endorse that.

ROMER: So if you want to say that they're a plan on the table that the president has put his name on, that is, certainly, one. And it's a bipartisan agreement that is very much like what the bipartisan fiscal commission came out. So I think there is a way forward, and the president has certainly endorsed it. And the question is: Could we get something like that, actually, through the whole Congress?

CONAN: That is Christina Romer, professor of economics at UC Berkeley, former chair of the president's Council of Economic Advisers. Russ Roberts, she mentioned, a research fellow at the Hoover Institution, with us from a studio there. We're also talking with Louise Story, a business reporter for The New York Times, at our bureau in New York.

This is all predicated on the development since Friday night, when Standard & Poor's, one of the big three ratings agencies, downgraded U.S. long-term debt from triple A to double A-plus, with a negative long-term outlook, the first time in history that U.S. debt had been anything but triple A. You're listening to a special coverage, coming to you from NPR News.

And let's see if we can go next to - this is Ruby, and Ruby's calling us from Mill Valley in California.

RUBY: Hi. Good morning. Well, good morning out here. I'm so glad to get this stellar group together. My big question is: Who is selling? Who's doing this selloff? Is it we individuals, or corporations, institutions? Who's doing this?

CONAN: Louise Story, any way to tell?

STORY: Well, you can't be precise about it, but you can see that both individuals and corporations have shifted a lot of money into cash holdings. So it seems to be somewhat across the board, that people are just looking for a safer place to be than stocks. And the irony is, of course, that safer place that they're finding is the U.S. Treasury.

CONAN: And gold, Russ Roberts. People are gold bugs again.

ROBERTS: Well, people are worried about inflation. They're worried - gold has historically been a hedge against rising prices. And given how much money the Federal Reserve has pumped in the economy, there's a lot of anxiety about future price increases. We haven't seen them yet, but that doesn't mean they're not coming. And people are holding gold as a hedge.

CONAN: And as we look at that, Ruby, are you satisfied with that answer?

RUBY: No, not at all.

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RUBY: No, no, no guys. I want to know - we're not selling any of our stock. Why would we sell any of our stock when it's going down? I really feel like it's billionaires, you know, people who - or is it pension funds? I mean, who's doing it? Who is listening to you, and the stock market is going down? Who are these people?

CONAN: I suspect it's not just me, but...

RUBY: No, I understand. I understand.

CONAN: ...Christina Romer, can you help us out, here?

ROMER: You know, I think, actually, the truth is the stock market's market, and we don't know who the individuals are that are - or the pension funds or whatever that are selling off. So I think that's, you know, that's just impossible to tell. I think, you know, the thing that is, as I mentioned earlier, a little bit perplexing is, you know, there's not a whole lot of new information, here. And so whether it's just people waking up to the fact that growth has been incredibly anemic in the United States, that we do have a very severe long-run problem, and people - you know, we haven't yet really faced up to it. I think maybe it's just sort of this gradual realization that we are facing some very tough economic times and tough economic decisions.

CONAN: Ruby, thanks very much for the call. Appreciate it. Here's an email from Megan in Asheville, North Carolina. Why is the oil price going down a bad sign, when the price of oil going up was a bad sign because we do not have extra income to spend? It feels like a no-win situation.

Russ Roberts, it is one of those curiosities that when things started to look better, the price of oil went up because the market's anticipated demand for oil would go up. And as things get worse, well, the price of oil drops.

ROBERTS: Well, I think that's a great question. And it's half-right, the emailer, I mean, is half-right. If going up was bad, why isn't going down good? And the answer is it is good for people who want to buy oil. But I think the reason it's perceived as bad is that it's an indication of a softness in the world economy.

But I certainly think it's true that people are often perplexed by price changes, and housing is the most important example in most of our lives. When the price of housing's going up, we homeowners - of which I am one, at least right now - we're all excited. But people who want to buy a house, that's a bad thing. So when prices come down, it's certainly bad for us. And, of course, it's had other ramifications in the financial sector, in the banking sector. But for people who want to buy a house, a low price is a good thing. So it's a good thing to remember that there are people on both sides of those price changes.

CONAN: And, Christina Romer, briefly, as you look at those price changes, do they signal to you that we're entering another recession?

ROMER: So, I think, where there's, you know, widespread agreement is we're in, certainly, a very, you know, bad situation with the economy. I think the best guess is that we're stalling. We're going to be growing anemically, but we're going to be growing. Certainly, whenever growth gets as low as it is, you know, the chances of having some negative growth go way up.

I think one of the things I found - so many people are, you know, are entering the double dip? Is this a recession? You know, the truth is, there's not that much of a difference between whether we're barely growing or whether output is actually falling. Both of those are pretty dismal situations for the economy. And we need to be very concerned, you know, even if, you know, we do keep growing. If we keep growing at such an anemic rate, we're not going to bring the unemployment rate down. We're not going to ever be able to get our deficit under control. And so it's very important that we focus on getting growth up.

CONAN: We'll look at ways to explore how to get growth up when we come back after a short break. Stay with us. I'm Neal Conan, in Washington. This is a special coverage, from NPR News.

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CONAN: We're talking about Standard & Poor's downgrade of U.S. credit, how that's playing out in the markets, and what happens next. What don't you understand about this downgrade? Call us: 800-989-8255. Or send us an email: talk@npr.org.

Our guests are Louise Story, business reporter for The New York Times, Christina Romer, former chair of President Obama's Council of Economic Advisers and Russell Roberts, a research fellow at the Hoover Institution.

One major component of the story is how international markets are responding, especially in Europe, where there are any number of fragile economies. And joining us now from Madrid, where he's on assignment for NPR, is correspondent Tom Gjelten. Tom, nice of you to stay with us.

TOM GJELTEN: Good to be with you, Neal.

CONAN: Spain, just one country in Europe that's dealing with a debt crisis. And we heard earlier today that, in fact, the European Central Bank is doing something it's never done before, and that is buying bonds. And they didn't say specifically, but we are expecting that they were bonds from Spain and Italy.

GJELTEN: That's right, Neal. They haven't said yet, but the bond yields for Spain and Italy dropped very sharply today. And I think that's pretty good evidence that, in fact, that's exactly what the European Central Bank is doing. They actually began, in a small way, to buy bonds from some of the other troubled countries, Portugal and Ireland, last week. That move, as I said, was much smaller, was also seen as a reward for those countries' efforts to introduce some fiscal discipline. And the European Central Bank, and in particular, the Germans wanted to reward to those countries for that tightening.

But it soon became apparent that wasn't going to be nearly enough, that they needed to intervene in a bigger way, and so we had this decision over the weekend - apparent decision, because as you say, they haven't announced it - to intervene in the Spanish and Italian bond markets. That's a really big move. It's also a really risky move.

CONAN: Risky politically, especially for Chancellor Angela Merkel in Germany.

GJELTEN: Well, that's right, because the German position has always been that these countries have gotten into trouble largely because of overspending, and the richer countries - like Germany, and to an extent, France - should not bail out their poorer neighbors so easily. But I think there now is a growing realization across Europe and, most notably, even in Germany, that that principle, while sensible, just doesn't make - doesn't work anymore now that the entire European economy is in crisis.

But it's also risky, Neal, because it's not clear that even a large-scale intervention by the ECB would be enough to really stop this drift toward default. And that's basically the last arrow in the quiver. So, you know, what happens if this doesn't work?

CONAN: Are there large questions being ask about, look, does it make sense anymore to have a situation where we have all these different countries with a single currency, but separate budgets? Everybody's responsible for their own debts.

GJELTEN: Yeah. That's exactly right, Neal. And, in fact, as someone said today, it's almost like the markets, the financial markets are making that decision on their own. They're sort of forcing these countries into a kind of a fiscal union, where they have to take responsibility for each other's fiscal problems. That definitely is not the way the eurozone was set up. And Germany has been steadfast in opposing it. But, you know, events are dragging Europe in that direction, and there are certainly some voices who say that this will not be resolved, this big European debt crisis will not be resolved until the eurozone actually becomes more of a fiscal union in the sense that they have the same fiscal spending and taxing policies.

Now, one thing that we might see coming out of this - and this might be Germany's price for supporting these moves - is much more rigid enforcement of budget deficit - budget spending guidelines in the poorer countries. Theoretically, they're supposed to keep their deficits to 3 percent of GDP, but most of these countries have just been ignoring that principle.

CONAN: One of those countries, the one you're in, is Spain. They have imposed some austerity measures. They may well have to impose more. What are you hearing from people there today about what were already very unpopular policies?

GJELTEN: Very unpopular policies. You know, unemployment here, Neal - I was here last in May 2010. Unemployment then was at 20 percent, twice what we have - more than twice what we have in the United States. And it's lingered at that level. It's still around 20 percent, and at least half again that much, around 30 percent for young people. So this is a country that has been enduring unbelievably high levels of unemployment for a couple of years now. And while the Spaniards are very impressive in sort of their spirit to go on and their perseverance, but it's really starting to wear on the population. That's what I've noticed in a couple of days here.

CONAN: NPR's Tom Gjelten, with us from Madrid, the capital of Spain. Tom, thanks very much for your time.

GJELTEN: Any time, Neal.

CONAN: Let's see if we can get back to our conversation. And let's get another caller on the line. And this is Amman(ph), Amman with us from Madison in Wisconsin.

AMMAN: Hi. I just - I was - I don't know much about what a point means on the stock market. I'm curious to know what can we expect in the nearer term from this pullback of essentially a thousand points on spending with consumers. Just curious to know what you think in the near term is going to happen.

CONAN: It's backed off a little bit. It was never down to 1,000 points. It's about 460 the last time I looked. So it's...

AMMAN: But you're not including losses from Friday, correct?

CONAN: Oh, I guess, and last Thursday too, it's 500 points last Thursday, I think you're talking about. So, yeah, about 1,000 points overall. Louise Story of The New York Times, can you help us out?

STORY: You know, one of the interesting things is that across Wall Street, a lot of analysts are still predicting really good earnings for companies in the end of this year. But now, as you're seeing the stock market fall so much based on this economic data, it may be that they lower those expectations and that the stock market is just racing ahead first and predicting that with this weak economy you're not going to see a lot of consumer spending.

So I'm not sure that the stock market fall is going to cause consumers not to spend. They may, 'cause they sell a little poorer, but it may also be that the stock market is just predicting that because of the weak recovery in the economy, they won't be spending.

CONAN: Amman, thanks very much for the call and for correcting me. You're right. Overall, 1,000 points. Christina Romer, you served in the White House. Is Wall Street a leading indicator, a lagging indicator? How much - do you watch it every day when you're in the White House?

ROMER: You know, I think one of the things that you try as policymaker is to, in fact, not make your decisions based on the up and down moves of the stock market. It is, as Louise has been describing, very volatile and we don't - though people like to talk that, you know, it went down for this reason, it went up for this reason, we, in fact, don't know. Those are people's guesses. And so it's very important as a policymaker to focus very much on, you know, the hard economic data, the economic indicators, the trends in the economy, and make your policy based on that.

I want to come back to what the caller just said about consumer spending, because certainly as has been described, if we have lost close to $2 trillion of wealth in the economy because of the drop in the stock market, that is likely to affect what consumers want to do. We know that wealth is one of the things that affects consumer decisions. And one of the things that's so troubling about the current state of the economy is just how weak consumer spending is.

That's one of the big engines of economic momentum, of economic growth. And if consumers are nervous, if they're feeling less wealthy, that could have a very severe effect on the economy. So you know, this is certainly something to worry about. It is another one of those shocks that is making it harder for the economy to recover.

CONAN: And Russell Roberts, as we look at this shock to equities on Wall Street, well, of course this comes after the terrible drop in the housing market, you made reference to that earlier - is this going to affect housing?

ROBERTS: Well, I think it's going to affect a lot of things. It's hard to know, because as we've already talked about, I think very important to point out that people are still buying treasuries, and that could be because the ratings change isn't so important, or it could be because we're the tallest pygmy, you know, that just everything is lousy, and to be the tallest pygmy is nothing really to crow about. So I don't think we have a very good idea of what's going to happen.

What I would say is that I think it's very difficult to treat consumer spending as sort of an independent effect on the economy. It's also a response to the economy. So when the economy is doing poorly, as it's doing now, of course people aren't going to be spending as much. They're not - employment is lower, so when the - we see the stock market going down, we're trying to talk about what the effect in consumer is going to be.

In a way, all of these things we're talking about, all these disturbing sources of anxiety, consumer spending, the stock market - these are all reflecting the fact that people are anxious. Investors are anxious, entrepreneurs are anxious, risk takers are anxious, consumers are anxious. And the fundamental question that we face, I think, as economic policy, in economic policy, is how do we make people confident about the future? That's the $64,000 question that economists, unfortunately, don't have a lot to say about. We have guesses.

We can say that if entitlement spending got under control, the budget got under control, people would feel more confident about the future or this or that policy. But those are best guesses. And it's a very - economists - as economists we should be humble about how well we understand what's going on. We don't really understand it very well.

CONAN: Here's an email from Edward in South Portland, Maine: I just read something about banks charging fees for large depositors who add cash to their accounts, presumably from stock market selloffs and that this has pushed wealthy investors into T-bonds. If that's the case, are banks afraid of temporary deposits for some reason or cashing in on the crisis, or is something else going on? Louise Story, is that accurate?

STORY: Yes. The Bank of New York Mellon came out last week and said we're not going to pay you, investor, for putting your cash with us. You know, normally the bank will pay you, you know, a 10th of a percent of something, it used to be a lot higher, to hold your cash there. But they said you've got to pay us. And the reason banks are starting to react like that is because the banks also have to reinvest their money. All the money the depositors put in, they've got to put it somewhere.

And we're talking about how there's nowhere good to go, treasuries or gold, that's about it. The banks themselves have a problem. Where do they put all the money to get a return to be able to pay the interest rate to the depositors? And they're running out of places, so they're starting to say it's a privilege to bank with us, and you should pay us.

CONAN: We're talking about the crisis that has developed since the downturn, the downgrade of the U.S. Treasury bonds on Friday night by Standard & Poor's. We're talking with Louise Story, you just heard, from The New York Times. Christina Romer, the former chair of President Obama's Council of Economic Advisors, now professor of economics at UC Berkeley. And Russ Roberts is a research fellow at the Hoover Institution.

You're listening to special coverage from NPR News.

And here's an email that we have. This from Sue. Would I be right in feeling the stock market activity this year has not correctly reflected the true nature of the U.S. economy? The market continued to climb until last week, even though more jobs have not been created and all key numbers have remained stagnant. Maybe investors are just now waking up after the downgrade. Christina Romer?

ROMER: So I think the key thing, it goes back to what I said earlier, which is the stock market is not a perfect indicator of either where the economy is or where it's headed. It actually is affected by lots of things.

I think the most important point that the caller makes is, you know, since the beginning of the year, we have had some real trouble in the economy and that the economic indicators, everything from our GDP numbers to our job creation numbers to our manufacturing numbers, all paint the same picture of an economy that is barely growing, and that is obviously not good enough, especially for an economy that still hasn't recovered anywhere near the jobs that were lost in the terrible recession of 2008 and 2009.

CONAN: Another email question, this one from Jack in Ohio. Is it true that when the U.S. credit rating fell, individual credit scores of U.S. citizens fell with it? Louise Story?

STORY: No, there's not a relationship between that. What could happen because the U.S. credit rating was dropped is if it becomes - if the government sees it become more expensive for them to - if they have to pay more interest on treasuries, then it could go into borrowing costs and be more expensive for consumers. But keep in mind, right now investors are rushing into treasuries, and so it's not raising the cost of borrowing for the government. So it may not affect consumer borrowing costs at all now or for a while.

CONAN: It may or may not, depending - and would you expect that there could be further downgrades, not just to the U.S. credit rating, to AA-plus, but would that lead some of the credit rating agencies, specifically Standard & Poor's, to say, well, we've already seen Freddie Mac, and downgrade as well? Some state and municipal bonds, would they be downgraded?

STORY: We're watching that carefully today because some of the rating agencies have identified states that are really dependent on income, like through Medicare, and maybe they have a lot of people living there who work for the federal government. They're very dependent on federal government income, and so we're watching those states. They may be downgraded.

The states have said publicly, though, that they have enough cash aside, enough savings, that they can weather a downgrade and they don't expect the borrowing cost to go up too much.

CONAN: So these would be states, particularly Virginia, Maryland, you would think, right at the top of that list.

STORY: Right. Exactly. They have a lot of federal workers there.

CONAN: Here's an email question that I think summarizes the question in many people's minds today, that from KJ in Blue Springs, Missouri. When does it stop? What happens if it doesn't stop? And Christina Romer, sometimes, well, Russ Roberts was talking about the psychology of the situation. This is a question about psychology.

ROMER: Well, I think the - it's a bigger question than that. I think it's a question about public policy, because, you know, I think we've talked earlier in the show about is this a wake-up call. Of course it is, as if we needed another one, but it absolutely is. I think the way this stops is we actually need a stronger policy response. And we've talked a lot this morning about how we need to make more progress on our budget deficit and that the agreement that was passed last week got us, you know, some $2 trillion of agreed-upon deficit reduction, but that's not enough. We know that isn't enough for dealing with out long-run problem. So we certainly need to come up with a plan for getting more deficit reduction.

But I want to come back that we're never going to solve this problem with our deficit if we don't get the economy growing again. So I actually think it's going to sound counterintuitive, but we actually need more help for the economy today if we're actually going to ever get rid of unemployment and if we're ever going to get our budget deficit under control.

So, you know, if I were still advising the president, I would be telling him to come out with a very bold plan that includes both more help for the economy right now. Maybe it's a big tax cut for employers that actually hire unemployed workers, and tie that with I'm willing to put entitlements on the table. I'm willing to put revenues on the table. Let's really get a much more definitive solution. And I think that's how this all ends, is by policy makers making that kind of a bold, aggressive move.

CONAN: Christina Romer, thanks very much for your time today. Appreciate it.

ROMER: Thank you.

CONAN: Christina Romer, professor of economics at UC Berkeley. Russ Roberts, thank you for your time today.

ROBERTS: My pleasure.

CONAN: Russ Roberts, a research fellow at the Hoover Institution. Our thanks as well to Louise Story, who covers business for The New York Times at our bureau in New York. Thanks very much.

STORY: Thank you.

CONAN: The numbers, well, the stock market is down 525 points and now below 11,000 for the first time since last fall. You're listening to special coverage from NPR News. I'm Neal Conan in Washington.

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