"From Bubble to Trouble: The Financial Crisis of 2008- Main Street Roundtable"
Thursday, November 27, 2008SUSIE GHARIB: The financial crisis is also having a huge impact on Main Street as the resulting credit crunch is now hitting businesses and consumers. So where will the crisis take the U.S. economy and how will it look when the dust finally settles? I talked about that with three prominent financial journalists: Floyd Norris, chief financial correspondent at the "New York Times," Chrystia Freeland, U.S. managing editor off the "Financial Times" and Allan Sloan, senior editor-at-large for "Fortune" magazine. I began by asking Allan what surprised him the most about the saga of this financial crisis.
ALLAN SLOAN, SR. EDITOR AT LARGE, FORTUNE: The first thing is that this has gone on for over a year and shows no signs of stopping. The second thing is the magic people who would always stop previous crises - the chairman of the Fed would smile and wave. It was almost like the pope and the problem would go away or the Treasury secretary or occasionally president, the waters would calm. And now, no matter what happens, it's getting worse and worse and worse.
GHARIB: Chrystia, what surprised you?
CHRYSTIA FREELAND, US MANAGING EDITOR, FINANCIAL TIMES: I agree with Allan. And in addition to that, two other things have surprised me. The first one is how global this crisis is. We were talking a year ago about decoupling, the idea that America could suffer this crisis alone; the rest of the world might be OK. That has turned out not to be true at all. Second thing is, really astonishing, is this is a crisis made in America, very successfully exported by America to the rest of the world and yet you see the U.S. dollar strengthening and the U.S. government having an increase and enhanced ability to borrow money in dollars from the rest of the world.
GHARIB: Floyd?
FLOYD NORRIS, CHIEF FINANCIAL CORRESPONDENT, THE NEW YORK TIMES: I've been surprised at how long it took the government, the Treasury and the Fed to realize how bad it was. We've never had a recession like this one before, at least in my lifetime. The Fed usually brings on recessions by tightening interest rates. They're afraid about inflation. They didn't do it this time. If anything, the Fed's error was in the Greenspan time when they let the asset bubble blow up and blow up and blow up. And that has alarmed me.
GHARIB: And so it's been dragging on, this crisis, Chrystia. What is going to be the next phase?
FREELAND: Well, I would've said a few weeks ago that the financial crisis was easing, the credit markets definitely were -- they weren't, sort of robust, but they were beginning to thaw and that we were moving into a really painful recession in the real economy. It has seemed to me since Hank Paulson's statements about the TARP and since he ruled out using the TARP to buy the troubled assets themselves, we've had some real anxiety in the credit markets and so I'm really concerned that the financial crisis part of it may not yet be over.
GHARIB: Is there another shoe to drop, Floyd?
NORRIS: Oh, we fear there is. At the moment, people have been getting worried that there could be more shoes. I think Mr. Paulson's -- what may be his big error was saying he wasn't going to spend any more of the money and let the Obama administration spend it. The idea that everything should stop until January 20 may prove to be very problematic. I'm not sure they have that luxury of time.
GHARIB: So, Allan, let's fast forward to the year 2010. Maybe the financial crisis will be over by then. What kind of economy are we going to be looking at?
SLOAN: First, I hope it's over by then because I can't take much more of this. And by then I'll be 65 years old or 66. I may have to retire.
GHARIB: How will your 401(k) be doing by then?
SLOAN: Well, it's a 101(k). My retirement plan is I have three children, I will spend four months rotating among the basements. That's how I'm going to do it. I think we'll crawl out of this sooner or later, but the United States will be diminished. The standard of living will be lower and one of these days, Chrystia's people will come to us and say, if you want to borrow more money, you have to borrow in a real currency, not the dollar and that's when we're really in trouble.
GHARIB: Floyd, we see that people are spending less, they're saving more. Are we entering a new age of frugality?
NORRIS: Well, temporarily we might be. It will be interesting to see how that comes out in the end. Those who have forecast that Americans will stop spending have been wrong over and over again. This time they may stop spending because nobody will lend to them.
FREELAND: I think in 2010 the new thing that might start coming up is inflation because the U.S. government is going to have to spend a lot of money right now, both on fixing the financial crisis and on a really significant fiscal stimulus, which Obama is talking about. At some point, it's going to have to start paying for that and one way to do it is the printing presses.
GHARIB: Let me get another prediction from you, Chrystia. The U.S. has been the leader in the world economy in the postwar period. Do you see that dominance continuing or is it nearing an end?
FREELAND: Well, I think already just as a matter of mathematics, we have seen that dominance slowly declining. I think it's been less the decline of America and more the rise of the rest -- one billion Chinese people, one billion people in India, moving out of poverty and into the middle class. That's great, but inevitably, it means we're in a much more multi-polar world economy.
GHARIB: What do you guys think?
NORRIS: One of the big issues of this coming recession is going to be how well the Chinese and the Indians handle the downturn. I don't think they quite understand how bad it's getting there. And that may be a problem. I hope you're right, that emergence from poverty will continue, but I don't think that's a sure thing.
GHARIB: Let's talk about Barack Obama for a moment. Chrystia, you wrote in a new column that the new president has to rise above the blame game and focus on what needs to be done. What is the most important thing Obama needs to do?
FREELAND: I'm afraid that he will still have to cope with the sort of emergency room working on the economy and maybe even still on the financial crisis and trying to make sure that that is fixed. I think the big question about whether he manages to be a truly great president, as I think people are hoping, is whether in the midst of this economic chaos, he manages at the same time to act on his big goals -- on health, on energy. We'll see. It's going to be tough.
GHARIB: Floyd, you wrote a piece in the "New York Times," proceed with care, Mr. Obama. Your thoughts?
NORRIS: The most important thing he's got in the longer term is getting the financial system back in shape and re-regulated in a way that it was not and that's worldwide issue. Getting it right on that one is far more important than getting it quickly.
GHARIB: Allan, last word.
SLOAN: I feel that if president-to-be Obama needed my input, he would've asked me. And since he hasn't done that and I haven't heard from any of his appointees, I will leave it to the three of you to advise him and I will just write.
GHARIB: I will leave it there. Thank you all so much. Happy Thanksgiving Floyd, Allan, Chrystia.
FREELAND: Pleasure, Susie.
