Listeners' Economic Questions Answered

The past week has seen the collapse of Lehman Brothers, the sale of Merrill Lynch, the government's rescue of AIG and the $700 billion bailout. Listeners had questions on various aspects of the meltdown. Robert McTeer, distinguished fellow at the National Center for Policy Analysis and former president of the Federal Reserve Bank of Dallas, and NPR's John Ydstie offer their insight.

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MELISSA BLOCK, host:

This is All Things Considered from NPR News. I'm Melissa Block.

MICHELE NORRIS, host:

And I'm Michele Norris. A few days ago, we asked for your questions about the cascade of earth-shattering financial news: the collapse of Lehman Brothers, the sale of Merrill Lynch, the government's rescue of AIG, and now the $700 billion bailout. Well, it's time for some of your answers. And joining us are NPR's economic correspondent John Ydstie. He's here in the studio. Welcome, John.

JOHN YDSTIE: Hi, Michele.

NORRIS: And we're also joined by Robert McTeer with the National Center for Policy Analysis. He's also a former president of the Federal Reserve Bank of Dallas. Mr. McTeer, welcome to the program.

Dr. ROBERT MCTEER (Distinguished Fellow, National Center for Policy Analysis): Thank you.

NORRIS: Now, more than a hundred people emailed us questions, and we picked a few that represent some of the themes that we saw. So without further delay, let's get to that first question.

Mr. HARLEN RAY(ph) (Caller): My name is Harlen Ray. I'm calling from Columbia, Maryland. My question is, we're talking about billions of dollars of losses and potentially trillions of dollars of losses from derivative swaps. My question is, if there's someone losing all this money, who is gaining? If someone steals my wallet, I lose, but the thief gains.

NORRIS: Dr. McTeer?

Dr. MCTEER: The winners in this are people that weren't very involved in any of this to begin with, and have a lot of cash, and now may be in a position to buy what will eventually become good assets at very low distressed prices. And that includes the government. You know, the government is going to do a good bit of buying of mortgage-backed securities, and people are worried about how much it's going to cost. But I really think there's a possibility that over time the government may make a profit, because it's going be imposing a hard bargain on what it pays. And given time, they probably are going to appreciate in value.

NORRIS: John, are there any other potential winners in this crisis beyond people who are liquid enough to take advantage of the bargains that are out there right now?

YDSTIE: Well, I think at the very beginning, there were some winners. The people who originated some of these subprime mortgages, they took big fees. And the people who may have owned them and packaged them and sold them off initially may have made some money on them. So there are some winners.

NORRIS: Let's go to another listener question. This one comes to us from the Midwest.

Mr. MARK WALTS(ph) (Caller): My name is Mark Walts. I'm calling from Milwaukee, Wisconsin. When the Fed pumps $70 billion of liquidity into the markets, from where exactly do these dollars come from? Firing up the printing presses at the U.S. mint? Doesn't this further devalue the dollar and fuel inflation?

NORRIS: So, Dr. McTeer, where exactly do these dollars come from?

Dr. MCTEER: The Federal Reserve and other central banks are unique in that when they spend money, they are actually creating new money. They give people a check that gets deposited into their bank, and the depositor gets new money. And the bank then redeposits it back at the Fed, and they get new bank reserves at the Fed. So it's created.

NORRIS: But when you do that, it seems that there would naturally be a worry about, does this further devalue the dollar and then fuel inflation? How do you prevent that from happening?

Dr. MCTEER: If that were the end of the story, it probably would. But if the Fed thinks this is causing too much money to be created, it will take measures elsewhere to offset that by selling government securities in the market. So, they give with one hand, and they take away with the other. And you end up with the redistribution of where the money is rather than a net increase.

NORRIS: Deborah Van Inglan(ph) emailed us her question from Rancho Cucamonga, California. She says that she would actually prefer that this mess be sorted out by the next administration, regardless of whether that's John McCain or Barack Obama. She says that the push for this bailout package seems like the run-up to the Iraq war, and she does not want taxpayers to have this burden placed on them in a time of panic. And her question is this, is there a reason why this needs to be done right now versus a couple of months from now? John?

YSDTIE: Well, I think everybody shares the concern about the size and speed of this. People don't like to be rushed into putting $700 billion worth of taxpayer money on the line. But when the Fed chairman says you have a few days to get this right or we'll have the worst economic crisis in the country's history, it's quite sobering. And you - I think you have to give the Fed chairman his due there. He is a professor of history. He's studied economic calamities. He's now in a position where he's got a lot of knowledge. So you have to take him at his word, I guess.

NORRIS: This question comes to us from out West. Ray Frost(ph) of Carmichael, California, wants accountability. And he asks, now that the U.S. taxpayers are saving the world from economic disaster due to the actions of the greedy corporate leaders, are there any criminal charges that can be brought up against them? Are there, Dr. McTeer?

Dr. MCTEER: Well, all of these institutions, so far, that have been intervened - I wouldn't call it a bailout because the leaders lost all their money and their stockholders lost most of their money - and in every single case, the CEO has lost his job. So far, there's been no indication that any of this was based on illegal activity. It was based on a big blind spot that everybody had when they viewed securitization as a good thing without recognizing the moral hazard inherent in it. I don't think there's going to be anybody to punish in the sense of - for wrong doing.

YDSTIE: I think the only place that you might find people actually punished is at the beginning of this chain, and that is in some of the mortgage lending that occurred that was fraudulent.

NORRIS: Steve Doubt(ph) of Twentynine Palms, California, sent us this question. Let's take a listen.

Mr. STEVE DOUBT (Caller): Unregulated derivatives are popping up in stories of financial tragedy. Are there any other unregulated financial instruments like derivatives or credit default swaps being created and traded that may cause similar problems? Thank you.

NORRIS: John, first off, is it right to call them unregulated?

YDSTIE: Well, credit defaults swaps are pretty unregulated. They're traded on private exchanges, essentially. There's not a public exchange where they're traded. And so there's very little regulation. There are other kinds of securitized loans beyond mortgage-backed securities which also are playing a role. Auto loans are securitized and sold in that way, and I believe credit card debt is as well. And there have been folks who have suggested that we may see problems there, especially if we dip into a significant recession.

NORRIS: Dr. McTeer, John is saying that these credit default swaps do pose a certain kind of threat. But Steve Doubt was looking down the road and wondering if we might see similar problems. Is that possible?

Dr. MCTEER: Well, almost by definition, there's going to be something out there that we haven't thought about or don't know about. It's like playing a game of Whack-A-Mole at the boardwalk on the beach. You knock one down and then another one pops up.

NORRIS: Robert McTeer is with the National Center for Policy Analysis. He's also a former president of the Federal Reserve Bank of Dallas. And John Ydstie covers the economy for NPR, which means he's going to be a very busy man for the foreseeable future.

YDSTIE: Indeed.

NORRIS: Thanks to both of you for helping us out.

YDSTIE: You're very welcome.

Dr. MCTEER: Thank you.

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Some Lawmakers Seek To Broaden Rescue Bill

Rep. Barney Frank and Sen. Christopher Dodd talk with reporters on Capitol Hill. i i

hide captionHouse Financial Services Committee Chairman Barney Frank (left) and Senate Banking Committee Chairman Christopher Dodd talk with reporters after a Sept. 18 meeting with Bush administration officials about a plan to rescue financial firms.

Chip Somodevilla/Getty Images
Rep. Barney Frank and Sen. Christopher Dodd talk with reporters on Capitol Hill.

House Financial Services Committee Chairman Barney Frank (left) and Senate Banking Committee Chairman Christopher Dodd talk with reporters after a Sept. 18 meeting with Bush administration officials about a plan to rescue financial firms.

Chip Somodevilla/Getty Images

Bush administration officials want Congress to approve a $700 billion aid package for Wall Street, and they want it to happen within days. Democrats say they're willing to help shore up the financial markets, but they want a bill that includes relief for homeowners and taxpayers as well.

Treasury Secretary Henry Paulson went from one Sunday TV talk show to another trying to explain why a deficit-ridden nation should go hundreds of billions of dollars deeper in debt — all to cover the bad bets made by some of the nation's wealthiest private firms.

Paulson's argument was simple: Things could get far worse should the U.S. not ride to the rescue.

"I have every confidence that Congress will go along with this ... that doesn't mean everyone in Congress will agree, it doesn't mean there won't be a healthy debate. But I am highly confident that we will get the authorities we need this week," he said on CBS' Face the Nation.

Rep. Frank Wants Economic Boost

Paulson said he not only wants congressional approval to be quick; he wants it clean — not to be loaded up with items he didn't request. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, followed Paulson on CBS:

"Secretary Paulson and I have a lot of agreement, but we have a difference on what's clean," Frank said. "We don't think that trying to stimulate the economy given the 6-plus-percent unemployment — let's not forget other problems as we focus on this one — I don't think that dirties up the bill."

Frank wants the bill to limit executives' compensation at the financial firms getting bailed out. He also wants a special tax on those making over $1 million a year to help offset the cost of the bailout.

Another leading Democrat, New York Sen. Charles Schumer, seemed to throw cold water on Frank's wish list during an appearance on Fox News Sunday.

"We will not Christmas-tree this bill," Schumer said. "The times are too urgent. Everyone has their own desires and needs. It's going to have to wait."

But then Schumer pulled out his own wish list for a bailout bill.

"When I and others have talked to Secretary Paulson, he has said he is open to changes, and I would call changes necessary in three areas. I call them THO: taxpayers — they have to come first; homeowners — we have to do something about the mortgage crisis, not just foreclosures but the price of housing, which is affecting everyone on Main Street; and oversight — we need some accountability here."

'The Mother Of All Bailouts'

And it wasn't just Democrats saying Congress should take a closer look at what's in the bailout.

"This is the mother of all bailouts, and we don't see the end in it yet," said Richard Shelby of Alabama, the top Republican on the Senate Banking Committee. He told CBS that he expected the bailout would actually cost more than $1 trillion.

"We don't know the endgame in this, and I'll tell you, what bothers me about this is that I believe that the chairman of the Fed and the Treasury secretary, Paulson, with all due respect to them, they've been staggering from crisis to crisis, and they haven't even said today that this will end the crisis."

Other congressional Republicans are closing ranks with the Bush administration. House Minority Leader John Boehner told ABC's This Week it's time Congress rose above partisan politics, even on the eve of a fiercely fought election:

"We don't need 535 members of Congress adding their best idea to this bill," Boehner said. "We need to keep it clean, simple, move it through the House and Senate, and get it on the president's desk."

Jon Kyl of Arizona, the Senate's No. 2 Republican, told Fox he's optimistic the bailout plan will move through Congress in time for lawmakers' planned adjournment.

"I think the chances are better than 50-50 that we'll get it done by the end of the week, and hopefully it won't be bogged down with too many extraneous and costly provisions," Kyl said.

That was before House Speaker Nancy Pelosi (D-CA) issued a defiant statement Sunday night. "We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome," she said.

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