STEVE INSKEEP, Host:
A man who made his name turning around failing steel companies is digging more deeply into the wreckage of the financial industry. An investment firm controlled by Wilbur Ross owns banks now. It also bought a giant mortgage servicing company. It's modified some troubled mortgages and foreclosed on others. This month, Ross' company becomes one of a handful that will get government help to buy so-called toxic assets. They will get the assets off the books of banks, buy them at a discount. In the latest of several conversations with Ross, we asked about the evolving plan for these mortgage-backed securities. The government will not be helping to buy all the bad assets.
M: Well, it's a small fraction but what is more important, I think, is the fact of the government program becoming available has corrected most of the problems that the asset-backed commercial paper market had had. Because when you think about it, the real reason that the paper is trading at a lower price than fundamental value is that people have unwarranted fears. And as they see corrective measures coming in, presumably they will lose some of that unwarranted fear and get back to normal.
INSKEEP: I'm curious if you think - when you look at the banking system, when you look at the mortgage market, if you think, as so many people do seem to think, that the worst is over.
M: Well, I think the worst is over in that houses are not going to go to zero. I think that the tremendous amount of press coverage of the rise in prices in the month of June over the month of May is a little bit exaggerated. First of all, June is seasonally a stronger month for house sales than May, anyway. But the unfortunate fact is that the prices in June this year were still way down from June a year ago. So I think it was a little bit of misplaced enthusiasm to think that the end has come. The end of this problem will come when June compares favorably to June a year ago, and July compares favorably to July a year ago.
INSKEEP: I was about to ask if you think - how soon you think we'll get back to normal. But is there any risk that this is the new normal?
M: Well, I think the new normal is complicated in a lot of regards. It's perfectly clear the American consumer was greatly over-leveraged back in 2006. We had a negative savings rate in a whole year. That hasn't happened since the Great Depression. So that was unsustainable. What complicates it is that since then, American homeowners have lost something like $6 trillion in net worth from the decline in home prices. But if you look at total household debt, it's only gone down by less than $200 billion.
INSKEEP: Oh, so collectively, our asset values have gone way down, but we haven't really been able to pay down that much debt in the meantime.
M: Exactly. And that's the structural problem that we have. And I think what will define the new normal is, what's really going on with these government programs is you're starting to transfer liabilities from private individuals to the public sector.
INSKEEP: And what you're saying, in the end, is if this debt doesn't go away, the government is going to borrow money, in effect, to pay it back.
M: Well, either borrow money or guarantee it. Now, a lot of the loans that they're guaranteeing, they'll never have to pay on because once you right- size the mortgage so that the payments are affordable, the probabilities of that mortgage going into default again should be a lot lower. So I don't think the government is taking vast risk in what it's doing. But what's also happening is Washington is becoming the new Wall Street.
INSKEEP: Will government be able to re-exit from that and yet leave the economy intact? Or are we moving toward a permanent socialization of the capital markets?
INSKEEP: We should mention you're in New York. I'm in Washington. You're saying maybe I'm in the financial capital at the moment.
M: You are. You are. I'm spending a day a week down there because for most major financial things, there's now a very big Washington impact.
INSKEEP: Wilbur Ross, always a pleasure to talk with you.
M: Nice to be with you again.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.