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Global Economy Affected By Wall Street's Meltdown


I'm Michel Martin and this is Tell Me More from NPR News. There was no rest this weekend for the people working to address the country's economic crisis. Treasury Secretary Henry Paulson made the rounds of the Sunday morning talk shows to sell the Bush's administration $700 billion plan to bail out the nation's financial institutions. Lawmakers on Capitol Hill were deciding how to put their own stamp on the package, and the Federal Reserve agreed to turn back time on Wall Street to convert the nation's last two independent brokerage firms into more traditional banks, which is the way things worked before the Great Depression.

It's all happening very fast. Here to try to help us understand all of this, our NPR's Adam Davidson. He's been reporting on the financial crisis. Also with us is our regular money coach and personal finance expert, Alvin Hall. Gentleman, we've got to stop meeting like this.


(Soundbite of laughter)



HALL: We're finally in the same room together.



DAVIDSON: Exactly.

MARTIN: You know, it's hard to know where to begin. So, Adam, let's start with the administration's bailout plan. What exactly what would it do?

DAVIDSON: Well, first, if I can take it one step back, it's looking like Wednesday, Thursday, somewhere in there, the global economy - you know how when someone has a heart attack or something? And they're rescued and the doctors say, well, you were legally dead for five minutes. It seems like it's fair to say the global economy was legally dead for a few minutes last week, that there was effectively virtually no borrowing and lending between major financial institutions. And if you don't have those guys lending to each other, that means no money is moving. If no money is moving, none of us are going to get paid. I mean, it is...

MARTIN: Now I know why I didn't feel so good last week. And so it's bad. It was really bad. It's not an exaggeration.

DAVIDSON: So I think - yeah, I think setting the stage for this shocking development Thursday night, Friday morning, this was about as scary as it gets for a financial system, and it really - it terrified Democrats, Republicans, Paulson, Bernanke, people around the world, reporters. So on Friday there was this broad idea, we're going to save it by buying all this junk, all what they called toxic waste, all these lousy assets that have no - that we don't know how much they're worth. They're forcing banks to write them down. The government is going to buy all of that, convert it to a burden on the taxpayer.

The government was trying to sell it as, you know, we might make money in the long run, but it was clearly a desperation move. I'd say on Friday my general sense was the vast majority of economic commentators thought that this is a great idea. We have to do it.

By Saturday, Sunday, once the people started seeing more about the plan, very few people were fully in support of the White House plan. They felt there is far too much power being given to the Treasury Secretary. They felt there are all sorts of nuisances about the detail, and I see Alvin nodding in agreement, I think.

HALL: Yes, I do agree.

MARTIN: Yes, I wanted to ask you about this, Alvin. First of all, the Democrats have started to argue. Now Adam has already pointed out that this was a bipartisan wakeup call. So there doesn't seem to be any disagreement about the scope of the problem, but the Democrats have started to argue that this bailout is way too much Wall Street, not enough Main Street. Is that a legitimate criticism and what do they want to do?

HALL: I think it is way too much Wall Street. I think that the administration has embraced the model that the businesses can help solve these problems when businesses actually help create these problems. Wall Street is about taking risk. By taking - by the government taking these toxic assets into its possession and then allowing the portfolios to be run by portfolio managers on Wall Street, isn't that like putting the fox in the hen house, in a funny way?

MARTIN: I don't know, Adam. What about it?

DAVIDSON: Well, I think that - this is the shortest bill I've ever seen in my life. I mean, it's like two paragraphs. Usually the most simple thing, you know, like in celebration of the Waters of Brooklyn or something that Congress passes is longer than this. This is the shortest thing, and it is massive transfer of power. For me, I'm just looking at it right now. Here is the paragraph that has gotten a lot of attention. It's section eight of the White House proposal.

Decisions by the secretary, meaning Treasury Secretary, pursuant to the authority of this act, are non-reviewable and committed to agency discretion and may not be reviewed by any court of law or any administrative agency.

That is pretty stunning. It seems to say that for the next two years, whoever is Treasury Ssecretary, and mind you, we don't know who is even going to be president in a few months, let alone who's Treasury Secretary, has effectively absolute power over many parts of our economy with no possibility of anyone ever reviewing it. That's really woken people up.

There's another part that says we're not going to follow standard procedures in hiring the private companies. Quite simply, the U.S. government does not employ enough people who know how to look at bonds and its credit default swaps and other things and figure out how much they might be worth. They are going to be hiring many people, maybe some of the laid-off people, we don't know. How much are they hiring them? what are those people's interests? There are huge questions here in a very short bill that raises far more questions than answers.

HALL: And right now, we're at a point where Hank Paulson has had a reputation for a long time of being the decent guy, an outstanding guy, a guy who is looking at this objectively and trying to find a solution that will benefit the overall economy. If we get somebody in there who's much more partisan that he is, then we could have a bigger problem looming ahead of us, especially if you look at the fact that the government just raised the debt limit to 11.3 trillion dollars. Think of the number of years it's going to take to pay off that debt.

MARTIN: And speaking of which, Adam or Alvin, either of you, which - where is this money to come from?

HALL: Taxpayers.


HALL: We're going to be very poor.

(Soundbite of laughter)

DAVIDSON: I mean, there's no way we can pay for it upfront so it's going to be added to our debt burden, which means we and our children and grandchildren will be paying it back. The effective impact is it raises interest rates. It's just a - for the rest of our lives, basically, or for next many years, it just will, you know, everything from credit card rates to mortgage rates to the rates banks use to lend each other will likely be higher because of this.

MARTIN: Well, Alvin, talking to you about this, then if the effect is to raise interest rates, isn't that sort of a tax increase, whether you're calling it that? I mean, is it...

HALL: Yes, it is, and - but that's the only way they're going to be able to get the foreign entities who buy the majority of U.S. government debt to buy the debt. They're not going to buy when it's low-interest rate. They want the treasury bills, treasury notes and treasury bonds to have a higher interest rate that will filter back down to the Main Street where everything will cost us a bit more.

DAVIDSON: So if - sorry...

MARTIN: Go ahead.

DAVIDSON: No, I was just going to say - I was just going to really echo Alvin's point. If you, Michel, were issuing Michel bonds and you wanted to issue more all of a sudden but there is the same customer base, you have to make them more attractive. You have to offer more in return.

MARTIN: Speaking of offering more in return, the other element of this bill is the Treasury Department will guarantee mutual funds for the first time. How significant a development is that?

DAVIDSON: No, those are only money market mutual funds, not other mutual funds. There is a smart economist - we link to him in our - Luis Zuniga, I think, that's how you pronounce his name, from University of Chicago, who says this effectively turns the U.S. economy into a government enterprise. I don't know that I'm prepared to go all that far but it basically takes a much bigger part of the U.S. economy and turns it, in a sense, into an arm of government policy, which is a dramatic shift.

MARTIN: And finally, speaking of a dramatic shift, Alvin, let's talk about converting the last two independent investment banks into bank holding companies. Banner headlines in the Wall Street Journal about this. What's the significance of this move and how does this affect, you know, consumers like us?

HALL: First, I think you're going to see absolutely no effect whatsoever, but over the long term you're going to see a few names become dominant in the banking sector, and it will really go back to the way it was pre-1929. I believe that when you have the banks and the insurance companies under this one big umbrella, then they're going to start sharing financial information. It's going to be targeted more, and over time there will be more and more arguments for a relaxation of the sharing of information rules, which were put into place when Glass Deko(ph) was created in 1939.

I think that over the long term the consumer might see some benefit but there will be definitely more targeted marketing for the average consumer by these institutions to keep more of their money under one umbrella.

MARTIN: Adam, what do you think about this?

DAVIDSON: I mean, I think it is the end of a 75-year experiment. I will point out that Europe had - did not have the system we had. They did not really have these large, independent investment banks. And it seemed to work out pretty well for them, so I might be a little bit less worried than Alvin. Although this is, you know, we are in ours, changing decades of U.S. financial history, and it's going to take decades to figure out what it all means.

MARTIN: What it all means. What it seems to mean is the end of these kind of incredible compensation packages that we sort of hear so much about, the sort of multi-million - tens of millions of dollars in bonuses. Are we ever to see that era again, Adam?

DAVIDSON: Of course.

MARTIN: So we will?

HALL: I'll answer this. Of course, we're going to see this era again. This is the way this regulates and works in this industry. A few people earn a gazillion dollars. It was all the Robber Barrens and then the economy suffers for it, and then people start to grow again and money starts to grow and then it repeats.

What's so interesting for me, I teach a course on the history - legislative history of the securities industry in the United States. This is all about the pendulum swinging. Every generation makes certain types of mistakes, leverage being a big one, promoting securities that they don't understand being another big one. We've just gone through that again. A few people made a lot of money. The market goes into a doldrums and then gradually rebuilds and everybody forgets and we start all over again.

MARTIN: And we have to leave it there for now, but something tells me we'll be back again pretty soon. Our personal finance expert, Alvin Hall, and NPR correspondent Adam Davidson both joined us from our New York bureau. Gentlemen, thank you.

DAVIDSON: Thank you.

HALL: Thank you. Transcript provided by NPR, Copyright NPR.