ROBERT SIEGEL, host:
This week's stock market performance makes you think back to the dim distant past when share prices were tumbling and stock jockeys on cable TV were apoplectic. That was early August. Go figure. Two months later, isn't the subprime mortgage meltdown still melting? No matter, the Dow Jones Industrial Average, which fell a little bit today, climbed back over 14,000 yesterday -and it's still there. Which papers do these bulls read?
We're going to ask Cary Leahey who is senior economist with Decision Economics in New York.
And, Cary, the real state market is in a stupor. Oil has been above $80 a barrel. There's evidence that consumers are scaling back their spending. Why no alarm on Wall Street?
Dr. CARY LEAHEY (Senior Economist, Decision Economics): Well, I think it's - first, three words: Fed rate cuts, meaning they cut interest rates very aggressively just a couple of weeks ago. And I think the stock market thinks that to help unfreeze the bond market to help keep the economy afloat and basically work. It's a magic going forward.
SIEGEL: Does that strike you as sensible or investors putting too much faith in Ben Bernanke and the Federal Reserve?
Dr. LEAHEY: I don't think they're putting necessarily much faith in Bernanke. Bernanke is taking a leap of faith that he's going to keep the economy afloat but at the same time, he essentially gave an overweight, fat-bloated stock market some more candy to play with. So he is worried that maybe people will say it's safe to get back in the water. We did all these idiotic things like subprime loans. We'll do more of them.
He's telling them don't do that. But what he is telling us is that at the Central Bank, they are so concerned about downside risks - the housing market spilling over to the rest of the economy and affecting consumer spending and business plans - that he's going to forget about any possible inflation risk and say let's focus on the economy and let's try to keep it to afloat.
SIEGEL: But it sort of had two things that happened yesterday. The Dow Jones goes up over 14,000 and the banks are reporting big losses that they had in the last quarter.
Dr. LEAHEY: Well, the psychology yesterday, and in many days, is bad news is good news. And what I mean by that is the fact that the banks are finally getting their arms around the subprime loan problem, the correct pricing of credit derivatives, which is a broader a problem as well. And in some sense, they finally bring that out in the open and sweep it under the rug for the third and fourth quarters, then they can move forward and make money. So, though the sectors that they're most worried about, the banks and the brokerage houses, may finally fess up. And if they fess up, the market says that's, truth, is good news.
SIEGEL: I can understand the psychology. Okay, the bad news isn't that bad. It is a silver lining. But is there any actually good news? Is - are there things about the economy that people on Wall Street are seeing that may elude others?
Dr. LEAHEY: I don't know if they're seeing things that may elude others, but the market is trying to figure out that - and this does happen - that the stock market tends to price good things that will come in the future. So even though housing starts - which are already down 14 percent - may fall another 15 percent, the worst is behind us. Perhaps, it's now the time to buy homes at 70 cents on a dollar and a couple of years later sell them on 80 cents on a dollar and pick up 10 cents as your profit.
But there are things like weekly chain store sales, weekly unemployment insurance claims, which are saying growth ought to be 2 percent or better or not too far below trend. They're not screaming slow growth and they're definitely not screaming recession.
SIEGEL: One last quick point, 70 cents on a dollar could get your dollar pretty soon. Has the effect of the weakening dollar - does that help, because American companies do business abroad. It might help them.
Dr. LEAHEY: Absolutely. A weaker dollar, we now have - one out of eight dollars comes from foreign trade. That's very, very powerful. The economy is slow. They're always a big plus for stocks.
SIEGEL: Well, Cary Leahey, thank you very much.
Dr. LEAHEY: Thank you.
SIEGEL: That's Cary Leahey, senior economist with Decision Economics in New York. Transcript provided by NPR, Copyright NPR.
