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Congress is promising quick action on a plan to buy up soured assets, such as bad mortgages, held by troubled banks and other institutions. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are crafting a proposal, which they plan to soon deliver to lawmakers. David Wessel of The Wall Street Journal and NPR's Adam Davidson answer some questions from Steve Inskeep and listeners about the financial crisis.

[POST-BROADCAST CORRECTION: In this interview, we answered a listener's question about whether his money was safe in a mutual fund at the brokerage Edward Jones by saying, "[T]hey are not FDIC-insured. ... no, your money is not safe in the sense that it's insured by the government." The answer referred to investment risk and the fact that mutual funds can decrease in value; if Edward Jones were to go bankrupt, the listener's account would in fact be safe because the company is insured through the Securities Investor Protection Corp.]


It's Morning Edition from NPR News. Good morning. I'm Steve Inskeep. The federal government has taken several steps since last night to shore up the economy. Wall Street is, so far, wildly enthusiastic, even if the rest of us remain a little confused. The big news is a planned, gigantic federal bailout of the financial industry. The details will have to be negotiated with Congress, so we do not know how it all works. We do know the basic idea. The government would save financial firms by taking over bad loans by the billions of dollars. We would all be on the hook, since we pay for the government. Before you become the owner of an enormous toxic investment portfolio, you might want some investment advice. So, we're going to do our best this morning to answer some of your questions. The answers will come from NPR's Adam Davidson. Good morning, Adam.

ADAM DAVIDSON: Good morning, Steve.

INSKEEP: He's in New York, and David Wessel of the Wall Street Journal is here in our studios in Washington. David, good morning to you.

Mr. DAVID WESSEL (Editor, Wall Street Journal): Good morning.

INSKEEP: They've both been our guides for this astonishing week, so let's go straight to your questions. The first comes from Dave Burt (ph). He's a farmer and a cattle man in Flora, Illinois. We've met him before in this program as part of our conversations about America along U.S. Route 50. He's got his money and land and farm equipment, but is worried about the financial future of his children and grandchildren.

Mr. DAVE BURT (Listener): I'm just curious to know how this problem could have gotten so big. How did it get this bad so quickly without them actually knowing what was coming, and that they couldn't have done something earlier?

INSKEEP: NPR's Adam Davidson.

DAVIDSON: Well, I'd say that a lot of the financial products that have caused this crisis - these weird things called collateralized debt obligations and credit default swaps - These are brand new. They're five years, 10 years, maybe 15 years old. And frankly, we don't know how to use them. They are so radically transformative of the relationship between financial institutions, and we didn't understand how little we understood them, even the smartest people at investment banks and the Federal Reserve and all over the world. So, the hope is that we really messed up this time, and like with any new financial instrument, we'll learn how to be grownups down the road. But we're just adolescents messing around with these things.

INSKEEP: Even the people didn't get it. Let's go to another question from Gary Stonewall, a handyman in Denver, Colorado. And he wrote in to Morning Edition to say he's less than five years from retirement and he's got a 100,000-dollar nest egg invested right now, in a seemingly safe money-market account.

Mr. GARY STONEWALL (Listener): I expect this money to go back into the market and grow. So, I will have a larger nest egg to retire on. And what are the odds of the market recouping its losses and actually going up during the next few years?

INSKEEP: David Wessel, good time to get back into stocks?

Mr. WESSEL: You know, it's a really good question and almost an impossible one to answer. We know that, over time, history tells us the stock market will recover. The American economy will heal itself and be healed by the economic physicians, and that the future of the country and its market remained bright. But if you have a five-year horizon, you can't count on the next five years being great. And so, my advice to a gentleman like this would be to be cautious, to diversify and not to buy anything that you don't understand. It's not a time for ordinary people to be taking extraordinary risks. Even the people - the Warren Buffets in the world are a little uneasy about how it's going to take to work out for this thing, and regular people just have to be careful.

INSKEEP: We've clearly had investors who are frantically selling, then frantically buying stocks this very week, maybe the same people. Is it safe to say that's the one thing you should not do as an ordinary investor?

Mr. WESSEL: Right. One of colleagues said to me was, had I done anything with my 401(k) plan? And I said, if I were going to do anything with my 401(k) plan, I should have done it six months ago. I didn't. This would be the worst time to just panic and get out.

INSKEEP: We're taking...

DAVIDSON: I don't know about you, David, but I'm not even looking at mine for this entire period.

INSKEEP: Adam Davidson and David Wessel are taking your questions about the financial crisis. Let's move on to Phyllis Copt (ph) who lives in Lake Compton, Kansas. She's just retired from her job as a public school teacher. She's 58, and she's got just over 100,000 dollars in retirement money that she moved around after she left work.

Ms. PHYLLIS COPT (Listener): And I took a 50-percent lump sum from the Kansas Retirement Fund, and I put it in a self-directed IRA with Ed Jones. You know, I'm counting on that money because I'm drawing a monthly stipend from that. I don't believe that Ed Jones is FDIC-insured. It's a mutual fund. And I just want to know if my money is safe.

INSKEEP: Adam Davidson, is our money safe if it's in the mutual fund?

DAVIDSON: It isn't. It's at risk. That is not insured. That is a risky investment. Whenever you make more money or you're hoping to make more money, that's because you're taking on more risk. I looked at Edward Jones when I saw this question, and they are not FDIC-insured. As David said, if you have a longer time horizon, five years, 10 years, you might be comfortable taking diversified risks. If you have a shorter time horizon, that's not - that's probably not advisable. But of course, we don't give financial advice. Consult a financial adviser. But no, your money is not safe in the sense that it's insured by the government.

INSKEEP: Well, if you've got a mutual fund.

DAVIDSON: In a mutual fund.

INSKEEP: If you've got a mutual fund, you are paying one of those smart people that you've mentioned earlier, couldn't figure out what was going on in the markets in order to manage your money. That's what you're doing.

DAVIDSON: Right. But if you have money in the safe instrument, a U.S. treasury bill or an FDIC - an FDIC-insured bank account, you're getting a very, very low return now. So, there's a cost to that.

INSKEEP: Another question comes from Jean Ackerman (ph), who owns a meat market with her husband in Milford, Ohio. She was also part of our conversations on U.S. Route 50.

Ms. JEAN ACKERMAN (Listener): See, I really don't understand how we got to this point. Our politics are involved in it. This campaign for president is probably one of the most controversial that we have had in a long time. And if they're running to run our government, they need to come out with an honest answer and say this is what happened, this is how it happened, and this is what we're going to do to rectify it.

INSKEEP: David Wessel, how political is all this?

Mr. WESSEL: There's politics in everything. This is Washington. The regulatory system - the oversight system failed, and we are now paying the price. I think the listener asked an excellent question, and what voters have to ask themselves is, do they think Barack Obama or John McCain is best equipped to move into the White House and do almost what FDR had to do to rebuild the American financial system? And I think you've seen both candidates today showing that they're going to do just that.

INSKEEP: And let's also pose this question that came to us from Lynn Seamus (ph) of Carson City, Nevada. Adam Davidson, he's asking, how is it that we allowed companies to grow to such a dominant size that we can't afford to let them go belly-up?

DAVIDSON: That is the question of this whole period, and there is no question that that is going to be the single-minded focus Congress or the new president, whoever that is, of the entire financial system. It's simply unacceptable. I'd say everyone agrees.

INSKEEP: Does deregulation cause that? Because some years ago, they encouraged financial firms to combine their different operations.

DAVIDSON: I'd say mixed deregulation along with regulation. It is a combination of errors caused by government regulation and the free market.

INSKEEP: And let's get another question from Dave Burt in Illinois.

Mr. BURT: When everybody was relieved when they came in and did the bailout on Fannie and Freddie, and then this last one with AIG - I mean, I realize maybe it is so bad that they had to do it. But it is not reassuring. What is the next shoe to drop? Do we start bailing out GM, Chrysler, the guy running the gas station, a Pizza Hut? I mean, at what point in time do you make a bad investment and you suffer the consequences?

INSKEEP: David Wessel, just as Dave Burt asked that question yesterday, we found out the bailout is getting bigger. We've got this huge bailout of financial firms. How far can this go?

Mr. WESSEL: We don't really know. I don't think the Pizza Hut guy is going to be bailed out, but each day brings a big surprise. I do think that what we're seeing now from the president and the Treasury secretary and the Fed chairman is an attempt to come up with a major fix that stops this sort of ever bigger Band-Aid and tries to cure the disease once and for all.

INSKEEP: And that, of course, is what the announcement was last night. Henry Paulson, the Treasury secretary, in meeting with congressional leaders last night and saying they are going to work out a bailout under which the federal government would take over a lot of bad debt from financial firms. And let me give our two gentlemen who've been answering questions an opportunity to pose them, because none of us seems to know entirely what's going on. David Wessel, what question is still on your mind?

Mr. WESSEL: The financial system is suffering the worst shock since the Great Depression. The economy is bad, but it's not even as bad as the last recession. Can that persist? Or are we about to enter a long Japanese-style period of economic stagnation?

INSKEEP: Yeah, troubling question. Adam Davidson, what question is on your mind?

DAVIDSON: I want to know how the fight for new regulation is going to go, because I think this is a time when we clearly need sensible reform of our regulatory system. I don't know how sensible an election year can be, and I want to see how that plays out.

INSKEEP: You had questions, we had some of the answers, and we just heard a couple of the questions we'll continue to try to answer over the coming days and weeks with David Wessel, economics editor of the Wall Street Journal and a regular guest on this program. David, thanks for coming in.

Mr. WESSEL: You're welcome.

INSKEEP: NPR's Adam Davidson continues to cover the economic story from New York.

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Correction Sept. 25, 2008

In the interview, we answered a listener's question about whether his money was safe in a mutual fund at the brokerage Edward Jones by saying, "[T]hey are not FDIC-insured. ... no, your money is not safe in the sense that it's insured by the government." The answer referred to investment risk and the fact that mutual funds can decrease in value; if Edward Jones were to go bankrupt, the listener's account would in fact be safe because the company is insured through the Securities Investor Protection Corp.



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