MICHELE NORRIS, host:
This is ALL THINGS CONSIDERED from NPR News. I'm Michele Norris.
ROBERT SIEGEL, host:
And I'm Robert Siegel.
Here's something we haven't said in a long time, the stock market went up this week. There was some good news about bank stocks, or at least not such bad news, big pharmaceutical mergers and in case you suspect you hear the hoofbeats of little balls over the horizon, Roben Farzad, senior writer for Business Week is here in the studio to do what, Roben? To pounce bear-like on this little bit of good news we have from Wall Street?
Mr. ROBEN FARZAD (Senior Writer, Business Week): And to pontificate and bloviate, of course.
(Soundbite of laughter)
SIEGEL: Okay, what do you make of this week on Wall Street?
Mr. FARZAD: Look, it's ice-cold comfort when you talk about a stock market, that even at the 7,000 level is at half its year 2007 high, right? And if we go back in history 6,500, 7,000 is what we saw in the beginning of '97, where I personally was in that interregnum between the Macarena and Spice Girls.
(Soundbite of laughter)
Mr. FARZAD: So, you know, it's freezing cold comfortable, but we'll take whatever we can get.
SIEGEL: You're getting nostalgic. Last week President Obama talked about bargains on Wall Street. Was there an unusual moment - the idea that perhaps stocks, the level they were trading at, really were undervalued, compared to the earning power of those stocks - do you think it had any influence? Or was he saying something that's a truism on Wall Street?
Mr. FARZAD: Yeah, for us in the biz it was really a "Twilight Zone" moment. Historically, even during the crash of '87, you see people at the Oval Office level really employing euphemism to talk about markets and talking about it in platitudes and anodyne phrases about stability, and the system is sound. But he actually went out there, he could've been in a Fidelity ad.
(Soundbite of laughter)
Mr. FARZAD: But, you know, the markets didn't snap back immediately. But it's nice to know that the White House is at least mindful of the fact that an exceptional amount of wealth is tied to the stock market in this country. And the stock market's gotten bludgeoned.
SIEGEL: And one of the problems for the stock market, I gather, can be explained by the phenomenon of crowding out, or the problem of crowding out. I want you to describe what that means.
Mr. FARZAD: Yeah, it's a bit inside-baseballed, but if you think about in terms of how - what would you do if your bank was offering really juicy savings yield if, for example, it was going to pay you 12 percent on a five-year CD.
Mr. FARZAD: You wouldn't have to take a flier in the stock market to get returns like that. So you would put all of your money and even what you thought would be your risk money - assuming inflation was low - in that CD. Similarly, right now what we're seeing within the capital markets is companies are having a vexingly hard time getting people to lend them money.
So they have to sweeten the yields. So while General Electric has a stock that's gotten killed in the market, simultaneously, this company, which was until recently a blue chip…
Mr. FARZAD: …with a triple A credit rating, has had to keep, you know, the yields keep going up to entice institutional investors to lend it money. So if the yields are up whatever, in the nine, ten percent range, for something that gets you priority in the capital structure, why would you take a flier on the stock? It's really that simple.
SIEGEL: So these companies that would like to have, I assume, investors, instead acquire lots of creditors.
Mr. FARZAD: They do. And it's a tug-of-war between creditors and investors. In an ideal world, you have a sanguine outlook on both fronts. Things are humming, your cost of capital is low, but stock market holders and a lot of bond market holders, mind you, in bankruptcy have gotten so burnt in the past three years that they're looking for some sort of guarantee.
And, also, one other point to bring in, dividends are being cut like never before. I mean it would've been unthinkable for General Electric or even Citi, until recently, to cut its dividends. So that coupon, that yield is not as secure on the stock side of the ledger.
SIEGEL: Thank you, Roben.
Mr. FARZAD: Thank you, Robert.
SIEGEL: That's Roben Farzad, senior writer for Business Week.
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