Markets Defying Government Rescue Efforts
MELISSA BLOCK, host:
From NPR News, this is All Things Considered. I'm Melissa Block.
ROBERT SIEGEL, host:
And I'm Robert Siegel. Another day, another 400 points. The Dow Industrial's lost 445 points actually after a similar lost yesterday. There is growing concern that the U.S. is in for a deep recession.
BLOCK: It was the financial sector that led the market down today. That happened despite the $250 billion the government is injecting into banks. That money was supposed to encourage private investment in bank stocks and encourage banks to lend. Neither is happening. As NPR's John Ydstie reports, there are a lot of questions about whether the Bush administration's plan is working.
JOHN YDSTIE: Treasury Secretary Henry Paulson has spent much of this week defending his used of the TARP program. He took sharp criticism on Capitol Hill from lawmakers concerned that pumping government money into banks isn't increasing lending on Main Street. Paulson counseled patience, and he said the moves so far have at least prevented the collapse of the banking system.
But even if the banks don't collapse, if they don't lend, you've got big problems says Simon Johnson, former chief economist at the International Monetary Fund and now a professor at MIT. He says it's instructive to look back at the Great Depression and what happened after the banks failed.
Dr. SIMON JOHNSON (Entrepreneurship Center, Massachusetts Institute of Technology): What really happened between 1929 and 1933 was a massive contraction in credit. Now, if we get a massive contraction in credit without the banks failing, then the TARP is not a success. The TARP will have failed.
YDSTIE: And, says Johnson, it's possible a very dangerous contraction in credit could happen this time even if the banks don't fail the way they did in the Great Depression. The sharp decline in banks' stocks over the past few days could cause that, he says.
Investors have been selling shares in financial institutions out of concern that bank loans will go bad in a deep recession, and banks will lose money. In fact, CitiBank's stock lost 25 percent of its value on Tuesday and suffered another big decline today. In such a climate, Johnson says, banks will stop lending and protect their capital just to survive.
That would be disastrous for the economy. To avoid that, he says, the Treasury should inject the rest of the $700 billion in TARP funds into the banks immediately. But that doesn't align with the plan for the TARP Secretary Paulson shared with lawmakers this week.
Secretary HENRY PAULSON (Department of Treasury): The prudent course at this time is to conserve the remaining funds available from the TARP, providing flexibility for this and the next administration.
YDSTIE: Johnson says suggesting the Bush administration is essentially closing up shop on the TARP until the new administration comes in has made investors nervous. Right now, he says, what's happening is that the markets are testing the government.
Dr. JOHNSON: The government has said they will support these banks, and the market is basically saying, OK, show us the money. If you say they're not going to fail, and you say you're not going to spend the second half of the TARP money, then how do you square that circle? And the answer is, of course, you don't. Either you put the money in right now, and you save the banks, or you don't save the banks. And the consequences of that would be catastrophic.
YDSTIE: Johnson says getting congressional approval to spend the rest of the TARP funds on the banks won't be easy because of bailout fatigue on Capitol Hill and among the public. John Ydstie, NPR News, Washington.
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