Earlier this week, the Obama administration unveiled its plan to help banks get a trillion dollars' worth of so-called toxic assets off their books. Wall Street reacted well: The Dow soared to its fourth-largest one-day gain in history.
Christina Romer, the head of the president's Council of Economic Advisers, has been helping sell that plan. NPR's Steve Inskeep spoke with her Thursday. A transcript follows:
Steve Inskeep: I want to ask a question that I thought I could never possibly ask about any story, ever: Is a trillion dollars enough?
Christina Romer: That's a good question. It's, in fact, the right question. People have different estimates of how many of these bad things are on banks' balance sheets, the numbers we hear —
Everybody's estimate is more than a trillion. It's two, three, 10 —
The numbers you might hear are $2 trillion. I think there's no question that a trillion will be unbelievably helpful — so I think that's certainly the way we're thinking, and we know that you can't get them all off immediately — so, I think the way [Treasury] Secretary [Timothy] Geithner said is, we absolutely start, and every one we get off helps confidence. And the question's going to be how far does it need to go?
Well, that's the next question then — could you end up in a situation where you do this investment, you get $1 trillion of bad debts off the books of banks and other institutions, and they still have several trillion dollars in debt; they're still "zombie banks," as they're described; they're still not in a position to loan money; they still don't have enough capital?
The important thing to realize and something we've been trying to work with people that have been thinking about what we're doing is to point out that it's just one of many things that we're doing. So, when the secretary of the Treasury announced his overall plan, right, it had the housing piece; it has the small business piece; it has the consumer and business lending initiative. The toxic assets is a piece, and we certainly think it's important — and so we have put this plan in place, we are executing this plan, and we're going to be monitoring it.
Isn't the Treasury's share of this money, the investment here, getting pretty close to the last of the bank bailout money you have on hand, the financial bailout money you have on hand?
The key thing is we absolutely have enough there to get this thing rolling.
You're saying, you're not spending your last dime yet, on this particular program?
We're absolutely not spending our last dime. We very much have the money that we think we need to make an important start on this program.
Meaning that, if you decided that you needed to buy $2 trillion in bad assets — if that was necessary because other investors just don't come in any other way — you've got the resources now, without going to Congress, to do that?
Probably not. Right? I think the key thing is, what the president has said is we're going to do what it takes. We have a comprehensive plan in place, and in the best case, this will be all that we need, or in a very plausible case. And then what I have great confidence in is that the whole government will do what it needs to get the American economy working again.
You're a student of the Great Depression — when President Roosevelt's administration famously improvised its way through the New Deal and made rapid changes. Do you feel like you're improvising now?
I feel like we've learned a lot from the Great Depression. I think in the last 60 years there've been crucial innovations — and I'll give you just an example, right? Roosevelt had kind of the idea of doing fiscal stimulus — did a quite, sort of small, fairly half-hearted [one]. I think one of the things that we learned is that if you have a major downturn, if you're going to do fiscal stimulus, it needs to be bold and aggressive. And that's exactly what we did. So I think we are definitely learning. I would say that we're certainly open to — I wouldn't call it improvisation — but to learning, right? If something doesn't work, we're going to be the first people to say, that didn't work, let's try Plan B.
When you think about the average consumer — people right now are spending less, they're saving more — do you think that's a fundamental thing that is going to be true for years to come and that any economic plan will have to take into account?
I think that's very likely. We do know that people lost a lot of wealth when the stock market crashed, when the housing prices came down. And that is surely going to affect behavior — I think it's not necessarily a bad thing. We certainly have thought that Americans needed to be saving.
Although, if consumers are not about to spend more, and if the rest of the world is suffering a recession, where is it that you anticipate a huge source of growth in the world a year from now, other than the U.S. borrowing and spending lots of money and borrowing and spending lots more?
Certainly in the short run, what the president has said is when private demand isn't there, that's the perfect time for the government to step in. It's a great time to do the infrastructure and the public investment —
Where do you see the recovery coming from? That's what I'm curious about.
OK, so I have a lot of faith in economies sort of adjusting to things, and so, if we do move to a higher savings rate, what basic economic theory tells you is that tends to bring down interest rates, that tends to encourage investment, and so you don't just stay in a low-level equilibrium — you actually get back and different sources of demand come in to fill the gap.
Having committed vast resources to fixing the economy, the Obama administration faces a question: If even more must be done to save the financial system, how will the government pay for it? The president proposed a 10-year budget that included money for a second stage of the financial bailout, but skeptical lawmakers cut it out. Christina Romer insists that the administration will still have the ability to act:
What the president has said is we're going to do what it takes — and one of the reasons [that] in his budget he said he put in that $250 billion placeholder is, he said, we don't know how much it's going to take. So we are absolutely going to start with this. Again, none of us has a crystal ball. It may be enough to do the job. Likewise, when we do the end, the stress test, and look at what banks need, the first thing they'll be told if they do need more capital: go to the private sector to raise it. That's another variable. We don't know. Maybe if we get enough of these toxic assets off, private capital will be happy to come in.
Steve Inskeep: I'm glad you mentioned the president's budget, because he did include, as you said, a placeholder basically for more bank bailout money if it were necessary, and as I'm sure you know far better than I, key senators have already said we're not putting that in our budget, we have no money for it anyway, and we're very dubious about it to begin with until we see a very specific plan from the administration. Are you sure you can get that money if you need it?
Again, the president has said we'll do what it takes. I firmly believe that Congress has the same attitude — that if it's clear that this is what it takes, I'm sure the president will work with Congress to do what we need for the American people.
You're confident that if it gets to that, that's your Plan B. You can go to Congress, you can get more money, you can expand this program or invent another program if you have to?
The important thing to realize is we have a comprehensive plan in place, and in the best case, this will be all that we need, or in a very plausible case. And then what I have great confidence in is that the whole government will do what it needs to get the American economy working again.
Christina Romer was also asked about the potential downside of the Treasury Department plan to join with private investors to buy up to $1 trillion in so-called toxic assets.
Steve Inskeep: When companies do their quarterly reports, or annual reports, they talk about their business plan and what their hopes are, but they're also supposed to disclose risk, and talk about the downside. If I'm a taxpayer, you're asking me to take on a trillion dollars in what are considered toxic assets. Can you give me the risk?
It's actually very important to realize — there are two things. One is why we're doing this, and that's precisely because the market for these toxic assets basically disappeared, right? So we needed a way to get them off banks' balance sheets. And then, in terms of the risks, the whole idea is going in with the private sector, partnering with the Fed and the FDIC was a way to I think minimize the risk for the American taxpayer, so that — we don't have the expertise to know how to price these things. If we have private investors with skin in the game, money on the line, we think that's going to help us to make good decisions.
You want to spread the risk; that's well understood. What risk remains, for us as a country, in pursuing this plan?
I think the bigger part is to say what risk there would be if we didn't pursue the plan, right? The thing that has been so important is to realize that doing nothing is not an option. We have a very sick financial system. The only way that all of this is going to work again is if we get it lending again.
Are you reluctant to talk about what happens if this doesn't work, which is sort of what I'd want to know?
No, I'm absolutely not. What we're doing is doing the best shot that we can to minimize the risk to the American taxpayers. Yes, we are taking on some risk, but that's what's necessary at this point in time.