Some Economists Unhappy About Bailout Deal
LIANE HANSEN, host:
The bailout package came together with speed because of the urgency of warnings by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. They cautioned that without some sort of massive intervention, the economy could seize up in a terrifying way. However, there are people who question that assessment. NPR's David Kestenbaum has spoken to some of them. He joins us. David, I know there are certainly people who have opposed the bailout because they think it's not the right way to go, but are you saying there are people who don't believe the sky is falling?
DAVID KESTENBAUM: That's right. I mean, it's totally fascinating to me. There's no survey of economists, but there are very well-respected people out there who are making this argument. John Cochrane at the University of Chicago is one of them. I talked to him for over an hour. And he told me that when he heard Ben Bernanke, the Fed chairman, talking about the $700 billion bailout, his reaction was instant outrage.
Dr. JOHN COCHRANE (Professor of Finance, University of Chicago): I love Ben Bernanke's story that there's no atheists in foxholes. And I got this vision of General Bernanke calling me from the foxhole and saying, we need a nuclear strike, and us sort of as the citizenry saying, OK, Ben, you know, you're seeing stuff that we don't see, but nuclear? It's going to wipe a lot of stuff out for a long time. Is it really that bad?
KESTENBAUM: So John Cochrane is saying, yes, there are some slow times ahead, but the economy is not going to freeze up.
HANSEN: How can there be such a difference of opinion?
KESTENBAUM: I know it's crazy, right? I mean, everything comes down to this question of a credit crisis. What does it mean? In a credit crisis it gets very hard, maybe even impossible, to borrow money. That may not sound like such a big deal, but borrowing and lending is essential for the daily functioning of the economy. So one example, we had a great story on this week about a company that among other things does pest control. And some days, they need a little extra money until the payments come in. So they would borrow money from this thing called the commercial paper market. And billions and billions of dollars get borrowed and loaned this way every day. And last week, this market just kind of froze, and that terrified people, except John Cochrane, who told me, yeah, you know, it's not the end of the world.
Dr. COCHRANE: So exactly what? We've heard those words, but what is going on? The - yes, these sort of short-term loans, overnight loans between banks shut down a little because not everyone was worried about who's next. That's a problem? That's a problem that we kind of have a good technology for solving.
KESTENBAUM: So he says there are lots of other ways for businesses to get money, and things are working. He points out that you can still go get a mortgage today just fine. If you're a company, you can today get a loan. And he likes to point out that according to the latest data, we're not even in a recession.
HANSEN: So Cochrane is essentially saying that we don't need this $700 billion bailout. That the system can handle this?
KESTENBAUM: Right. But let me give you the counterargument. So one of the ways the companies are having to borrow money these days is by getting a line of credit from a bank. And the fear is that the banks can't continue to do this, especially if everyone is going to go to them for lines of credit. They just won't have the cash, you know, to pay out. So the Federal Reserve has made it easier for banks to get cash. It's allowing them to borrow from the government using as collateral those mortgage-backed securities, you know, that toxic waste that no one wants to touch. So I talked to Chris Mayer about this, he's an economist at Columbia University. And he says you still have the danger here that things could seize up, because that collateral is not very good.
Dr. CHRIS MAYER (Professor of Real Estate, Finance and Economics Division, Columbia Business School): I can take a bunch of, you know, stuff inside a trashcan, and I can give it to the Federal Reserve for a million dollars. And the Federal Reserve will give me a million dollars. But if that trashcan turns out to be worth nothing, I have to still give the Federal Reserve that million dollars back. That's what I mean when I say that the Federal Reserve is providing cash into the system, but the losses are still the losses that are being held by the banks.
KESTENBAUM: So he's saying the banks could collapse. Right now people are worried about Wachovia Bank.
HANSEN: But Washington Mutual was the largest bank collapse in history, and it didn't just disappear. It was bought up, and by the next morning it was like nothing happened.
KESTENBAUM: Right. But what Chris Mayer says is that if you start losing banks, things get really messy. That happened in the late '80s. Banks collapsed, and some companies actually got pulled.
Dr. MAYER: I think the risks at the moment that the financial system is going to implode are significant enough that the tradeoff is worthwhile for the government. We don't want to be Japan where our financial system completely shuts down, and we go through a decade or longer of kind of being walking zombies.
HANSEN: David, what does your skeptic say?
KESTENBAUM: I asked John Cochrane, you know, if you were treasury secretary, would you really have the courage not to do the bailout? And he said, yes, he hoped he would.
HANSEN: NPR's David Kestenbaum. David, thanks a lot.
KESTENBAUM: You're welcome.
HANSEN: You can hear more from John Cochrane on our new "Planet Money" podcast at npr.org/money.