The Economy Meltdown
John Moe
Chris Farrell
Angela Kim
SEPTEMBER 20, 2008
- Watching the stock index fall.
- (China Photos/Getty Images)
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This week's events on Wall Street seemed like something from a movie. From the start of the week there was panic in the financial world about how the bankruptcy of Lehman Brothers would affect other financial markets. There was steep drop in the DOW and the government came in to help with bailouts. This is a problem that isn't going away and to put everything into perspective, we spoke with American Public Media's chief economics correspondent, Chris Farrell.
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John Moe: So I've got to ask you, the same question that probably everyone has been asking you all week. How safe is my money?
Chris Farrell: Your money this weekend is safer than it was last weekend. And the reason for that is that the federal government has made a number of extraordinary actions. One of which is, the U.S. taxpayer - you and I - are essentially back-stopping the entire money market and mutual fund industry $3.5 trillion, so we don't get a run there. And then this morning, the White House is delivering a plan to Congress - a $700 billion proposal in order to rescue the financial sector.
Moe: And that's the plan that Congress is spending all this weekend hashing out and negotiating.
Farrell: That's right. And what the plan does, is it raises the debt limit, so we don't run into any problems there. We're going to all learn about this process called "reverse auctions." In a reverse auction, you try to get the product at the lowest possible price. But if you boil it down, what the federal government is going to do, what the U.S. taxpayer is going to do, is take all these toxic mortgages out of the U.S. financial system and put them in a separate entity.
Moe: OK. Question number two, which everyone is probably asking you in the hallways this week, will I ever be able to retire?
Farrell: That seems to be the dominant question I'm getting. Sometimes with a little black humor, sometimes with anger.
Moe: Depending on your age.
Farrell: Yes. And age does matter. Your time horizon is important. If you have a reasonable time horizon, 10 to 20 years, you'll get through this OK. And by the way, if you're 55 years old, if you look at average life expectancies, you have another 20 to 30 years to live. So you don't want to be doing anything with panic. And that's the bottom-line message. You don't want to be doing anything to panic. But at the same time you want to go through and hedge your portfolio against risk. You want to make sure that the money that you have will be there tomorrow. But for those of you who have a well-diversified portfolio - I know it's an ugly expression- but if you have that well-diversified portfolio, you'll get through this, take some lessons, and then you can get more conservative later on.
Moe: Now, like a lot of people, I like to think that I've been playing by the rules and living relatively within my means -
Farrell: Of course you have.
Moe: Of course I have. But other larger institutions, sounds like they haven't been. This isn't fair, is it, that we're bailing these people out?
Farrell: It is not fair.
Moe: Thank you.
Farrell: It is completely unfair. And you know what? Life isn't fair. It's the nature of the best. This is the mother of all bailouts. But with any bailout, it is unfair. With a bailout, you have bad outcomes, worse outcomes and the worst outcome. Worst financial crisis since the Great Depression, you stare at the abyss and you're going to bailout a lot of irresponsible people in order to prevent an economy from tumbling into a great recession.
Moe: So what have we learned this week?
Farrell: Well, what we learned this week - just taking a look at the individual - is you really do have to manage your portfolio, your money, conservatively. You know, all those bromides that your mother used to tell you that would drive you crazy-
Moe: She used to say life isn't fair also.
Farrell: Exactly. Well, turns out, she was right.
Moe: All right. Good luck following the events of this weekend. Looks like no one gets the weekend off this week.
Farrell: Well, I think you had the most profound comment in summarizing the week: "Whew."
Moe: Whew.
Comments
Comment | Refresh
From Irvine, CA, 09/23/2008
Before we can hope to stabilize the economy, we need to stabilize our thinking. In the news of the economic meltdown, I have heard repeatedly that even Congress and investment banking houses don't know the full extent of their losses and can't fully understand the complexity of the banking practices hitherto shrouded in secrecy. To try to push a bailout down the throats of American citizens in one week needs to be recognized as nothing other than the use of fear to persuade the public-- fear that is akin to panic on Wall Street and akin to the fear used to lead the country into war against Iraq.
Thank God for people like Allan Meltzer of the Carnegie Mellon Institute (PBS Newshour, Sept. 23)whose memory recalls repeated instances of this scare strategy. It is an insult to the intelligence of the American people that Paulson even proposes a decision of such magnitude be "solved" in a week rather than with deliberative, critical thinking. The government-is-a-white-knight come to save the American people is a fairy tale. It is critical to remember that the Supreme Court gave First Amendment rights to corporations, i.e., nonentities. It is further critical to remember that money from these corporations--moreso than from citizens-- lines the pockets of administrators and members of Congress.
Does something need to be done--and done very soon? Yes, but that something needs to be done without panic, ego, and conflicts of interest determining what is best for Main Street. Metzer's proposal to offer loans and no dividends until the loans are repaid is a clear and well thought. So is laissez-faire.
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