RENEE MONTAGNE, host:
This is MORNING EDITION from NPR News. Good morning. I'm Renee Montagne.
STEVE INSKEEP, host:
And I'm Steve Inskeep. Next, we're going to dig into the debate over how to fix the banking system. Chicago Public Radio's THIS AMERICAN LIFE as well as NPR's PLANET MONEY have been studying possible solutions. They're working together. And they're finding the solutions could be even more painful than we might have imagined. NPR's Adam Davidson and Alex Blumberg of THIS AMERICAN LIFE have the story.
ADAM DAVIDSON: I am holding in my hand a piece of paper. And Alex, this has got to be one of the most surprising and illuminating documents of this whole crisis.
ALEX BLUMBERG: Yeah, it's a one-page research note from an economist at Deutsche Bank and it outlines in the clearest terms that we've seen lately what kind of solution many bankers are looking for. Its basic message: We should forget trying to get a good deal for taxpayers; even trying to do that will hurt.
DAVIDSON: Let me quote my favorite sentence here. Ultimately the taxpayer will be on the hook one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line.
In other words, this paper says, if the government tries to save taxpayer money, a lot of us will lose our jobs and the whole economy will suffer.
BLUMBERG: And it offers a solution any banker would love: The government should - and I'm quoting here - estimate the highest price it can pay for various toxic assets on financial institution balance sheets, and then buy them.
DAVIDSON: Another economist, M.I.T.'s Simon Johnson, wrote about this note on his blog, and he has a word for what this document is.
Professor SIMON JOHNSON (M.I.T.): This is a robbery note. It's saying, guys, either you'll have 20 percent unemployment or national debt will go up to these dangerous level, unless you buy toxic assets — not for what they're worth, not for what the market price is; as much as you can pay.
DAVIDSON: So it is saying - I mean, the key line here is: The taxpayer will pay one way or another. I had a landlord. I don't think he was in the mafia, but he tried to cultivate the image. And he would, you know, he'd say things like there's an easy way and there's a hard way. And I can just hear him saying that - you're going to pay one way or another.
And so basically what this note is saying is, look, guys, you're going to hurt either way; give us the money now, we'll try and make it easy for you.
Prof. JOHNSON: My first reaction - my first reaction was: it's a spoof. My second reaction was: Oh my god.
(Soundbite of phone ringing)
DAVIDSON: We figured Johnson should argue it out by phone with the Deutsche Bank economist Joe LaVorgna.
Mr. JOE LAVORGNA (Economist, Deutsche Bank): Joe LaVorgna.
DAVIDSON: Hey, Joe. It's Adam Davidson from NPR.
Mr. LAVORGNA: Hi.
DAVIDSON: Hi. So I'm on the line with Simon Johnson. The - your note today, did you write it or you wrote it with your staff?
Mr. LAVORGNA: Me.
DAVIDSON: You wrote it?
Mr. LAVORGNA: Right. Yes, I wrote it.
DAVIDSON: Johnson was actually really nervous about calling him. He thought LaVorgna would get all mad at us for calling it a robbery note. But LaVorgna was cool.
Mr. LAVORGNA: I think the bottom line is, simply, someone has to pay for the mess that's been created. And there's no escaping the taxpayer is on the hook.
BLUMBERG: Let me just say that Joe LaVorgna is finally coming out and saying something that every other bank and lots of government people have avoided saying. They've been playing this game, saying there's some magical recipe where the government bails out the banks, the banks do better, and the taxpayers end up making money. Everyone wins. And this note is saying what we keep hearing from economists: that probably can't happen. Someone is going to lose. And LaVorgna is saying he knows exactly who that's going to be: you.
Prof. JOHNSON: I think, Joe, I found it refreshingly honest. But it also kind of took my breath away. And the reactions - I put it out there and I asked people what they thought on my blog. I didn't use names. I just put out this key paragraph that you were just discussing and the key issue, the taxpayer will pay one way or another. So one guy said, quote - he's sort of paraphrasing how he read the note. He said that sure is a nice global economy you've got there; be a shame if anything happened to it.
BLUMBERG: And Joe, I gotta say what I love about your note. If we - do you mind if we call it a ransom note?
Mr. LAVORGNA: I would prefer…
(Soundbite of laughter)
Mr. LAVORGNA: If I was on my own, I would say fine. But I wouldn't say a ransom note. I would say a reality check. I mean the thing is, I think Simon's exactly right, and this is the issue. We're delaying the pain. And you got to just - you got to deal with the problem. And I guess the issue is just dealing with the problem. What we've done to this point has just simply not been aggressive enough. So whatever the approach is, let's just get there.
DAVIDSON: Simon Johnson actually agrees with LaVorgna on one thing. The taxpayers are going to have to pay to get this out of this mess. Johnson thinks if we're going to spend our money anyway, it's ridiculous to save the same bankers who caused this crisis. He likes a different approach, where the government directly takes over banks and then sells them to new owners, maybe for a profit, maybe for a loss.
BLUMBERG: Now, Adam, I talked to a guy who has something to say to people who want to pin this whole thing on banks. Here is a picture.
DAVIDSON: Okay, this is a graphic.
BLUMBERG: I talked to David Beim, a former banker, and now a professor at Columbia Business School. He is in his office showing me a graph of how much debt we the citizens of America are in, how much we all owe on our mortgages and credit cards, compared to the economy as a whole, the GDP. For most of American history, it was below 50 percent. And then…
Professor DAVID BEIM (Columbia Business School): From 2000 to 2008, it just goes - like it's almost a hockey stick. It goes dramatically upward.
BLUMBERG: A rocket.
Prof. BEIM: It hits 100 percent of GDP. That is to say, currently consumers owe $13 trillion when the GDP is $13 trillion. That's 100% of GDP owed by individuals. That is a ton.
DAVIDSON: And I'm going to ask you a leading question, because I'm looking at the graph right now. Tell me, Professor, has there ever been time in history when we've owed that much before?
Prof. BEIM: I'm glad you asked me that. And guess what - the earlier peak, way off on the left part of the chart, is 100% of GDP in 1929. This is a map of twin peaks - one in 1929, one in 2007.
DAVIDSON: Does that chart scare you?
Prof. BEIM: Yes. That chart is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks. It's something that has little to do with the mechanics of mortgage securitization or ethics on Wall Street or anything else. It says the problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us.
We have over-borrowed. We've been living very high on the hog. We - our standard of living has been rising dramatically in the last 25 years. And we have been borrowing much of the money needed to make that prosperity happen.
BLUMBERG: In other words, the problem the banks are facing is the problem we as a society are facing. We all have too much debt. And getting rid of it is going to be painful.
DAVIDSON: The thing I got from talking to all these people who said if you want the solution in which the most guilty people pay the most and the innocent don't have to pay anything, well, that's just not going to happen.
BLUMBERG: Yeah, it seems like we're way past that. We are going to spend a lot of money. We might bail out some banks that some wish we wouldn't. There is no magical solution where we get out of this mess without any pain.
DAVIDSON: And while they might disagree on who will bear the brunt of that pain, all the experts we talked to said the longer we wait, the worse of it will be for all of us.
Adam Davidson, NPR News.
BLUMBERG: And for THIS AMERICAN LIFE, I'm Alex Blumberg.
INSKEEP: Cheerful thoughts on this Friday morning. There's a lot more about the banking crisis on our PLANET MONEY podcast and blog at npr.org/money, and on this weekend's edition of THIS AMERICAN LIFE.