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Americans Feel Economic Pains Despite Government Efforts

March 14, 2008 at 6:10 PM EST
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President Bush and Federal Reserve Chairman Ben Bernanke sought to bolster confidence Friday that U.S. economic growth will recover despite a recent string of bleak economic reports. Two financial reporters examine how the slowdown is impacting American consumers.
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JIM LEHRER: Judy Woodruff has our economy story.

JUDY WOODRUFF: From Wall Street to Main Street, fears about the U.S. economy continue to mount. Today, both President Bush and Federal Reserve Chairman Ben Bernanke said the government is responding and is prepared to do more to restore confidence in the economy.

Here to tell us more is David Wessel. He’s the economics editor for the Wall Street Journal. And Jane Bryant Quinn, she’s the best-selling author and columnist for Newsweek and Bloomberg.com.

Welcome to you both.

Today, another quite a day, on top of a week of — already we’ve seen a lot of turmoil in the economy. Today, David Wessel, the stock market fell almost 200 points. You had what is apparently an unprecedented bailout by the Federal Reserve of the nation’s fifth-largest investment bank.

Is the economy even worse off than we thought a few days ago?

DAVID WESSEL, Wall Street Journal: Well, it’s sure looking that way. You know, the risk here is that we have a downward spiral, where something like Bear Stearns makes people worried about another investment bank, which makes everybody a little more worried about everybody else, so they make a few less loans, interest rates go up a little bit, even though the Fed is cutting them, and so forth. So, yes, the risk seems to be rising quite a bit.

JUDY WOODRUFF: Jane Bryant Quinn, do we know the full picture yet of how bad things are going to be?

JANE BRYANT QUINN, Columnist, Newsweek: Clearly we don’t, Judy. I mean, every time we think, oh, we’ve got the last shoe to drop, Imelda’s closet falls over again and we have a lot more shoes on the table.

I mean, just a month ago, Bear Stearns said they had plenty of cash, don’t worry about the liquidity crisis. And then, in 24 hours, suddenly Bear Stearns is going broke.

And this is the problem with the lack of confidence. You simply don’t know what is on other banks’ balance sheets.

Tweaking interest rates not enough

David Wessel
The Wall Street Journal
I think the president is in a difficult position at times like this. If you express fear, it's like shouting "fire" in a crowded theater, and he was trying to be optimistic and speak to the fundamental strength of the U.S. economy.

JUDY WOODRUFF: Well, and I want to ask you about that lack of confidence.

But, first, let me -- David Wessel, the Federal Reserve chairman, Ben Bernanke, said today the bank stands ready to help homeowners who are facing foreclosure. We know all the talk is that the Fed is going to lower interest rates again next week.

But when you put it all together, how much difference does that make for how many people?

DAVID WESSEL: Well, that's a good question, Judy. The Federal Reserve chairman today, what he did, if you look at what he did, not what he said, is he basically, as you said, bailed out Bear Stearns. The speech he made had no new information in it.

The fear is that just cutting interest rates further -- although they're likely to do that -- will be not enough. I was at a forum at the Brookings Institution today where Larry Summers, the former treasury secretary, spoke, and he described interest rate cuts at a time like this as giving antibiotics to fight a virus, that it's just not enough, which is why you're seeing so much talk -- not from the president, but from others -- about some big taxpayer-funded rescue of either the banking system or the homeowners.

JUDY WOODRUFF: Well, what about what the president said today? I mean, he acknowledged we're going through -- the economy is going through tough times, but he counseled patience, and he said there are clear limits to what he thinks the government should do. What bearing does that have both on what's actually happening and on consumer confidence?

DAVID WESSEL: I think the president is in a difficult position at times like this. If you express fear, it's like shouting "fire" in a crowded theater, and he was trying to be optimistic and speak to the fundamental strength of the U.S. economy.

I read his speech, though, as being fairly negative about all the proposals that are circulating on Capitol Hill to do more. He kept pointing out all the problems with them.

So it looks like he will be resisting these efforts from Democrats, in particular, on the Hill, to do something more soon. But in the past, he's said such things and then, a few weeks later, has had to capitulate as things get worse.

Avoiding perception of bailout

Jane Bryant Quinn
Newsweek / Bloomberg.com
Foreclosures are at record rates. People look around and they see foreclosed homes on their blocks and they see nothing but trouble ahead.

JUDY WOODRUFF: Jane Bryant Quinn, then, given what the president said today, and given all these other signals, what message are ordinary consumers taking away from this?

JANE BRYANT QUINN: I think right now they're taking away the message that things are bad and they're going to get worse. Clearly, we're in a recession. We're going to have job problems. We've got difficulties with the mortgages.

You know, they supposedly had a plan that we're going to help consumers deal with mortgages who are facing foreclosures. And they talk a lot about it, but it has affected very few consumers so far. Foreclosures are at record rates. People look around and they see foreclosed homes on their blocks and they see nothing but trouble ahead.

So far, I would say it's been mostly jaw-boning to try to deal with the most significant financial crisis we've had since the 1930s. And all these working groups that the president has, I think they're going to come up with the seeds of this and the seeds of that.

And I agree with David, that as things are going to get worse and then they're going to have to step up to the plate and do something more. And eventually, I am sure there will be some taxpayer funds needed to bail out the financial system, to bail out homeowners, to do something. And you just can't let your financial system fall apart.

JUDY WOODRUFF: Why are you confident that that's going to happen?

JANE BRYANT QUINN: I'm confident because, if you let it fall apart, it would just be unimaginable. Ben Bernanke, the Fed chairman, has spent a lot of time studying what has to be done in crises like this, and he has made it very clear that the Fed is now going to be activist, and they are going to put as much money in the system as they have to, to see what they can do.

I think it's not going to be enough. I think the political system will have to respond, as well, with some kind of a specific financial bailout.

JUDY WOODRUFF: And how do you see that, David? I mean, again, in terms of what ordinary people are feeling, at what point does the political system have to make a turn, make a decision to do some of these things that Jane's describing?

DAVID WESSEL: Well, I think we're getting pretty close. I think it's unfair to say that they haven't done anything. The efforts they took were designed to try and force lenders and mortgage servicers and borrowers to come to terms voluntarily, to set up a system to make that happen.

And they're afraid, if they tell everybody, "We're going to have a bailout," that everybody will say, "Well, then, fine, I'm not going to cut a deal with this mortgage-holder, this guy who's in trouble. I'll just wait for the government to bail me out." So there's a reason to try and force the private sector to come together.

Secondly, the Fed has done quite a bit, cut interest rates more than 2 percentage points, put over $400 billion worth -- or up to that much -- of mortgages on its balance sheet.

I think what's happening, though, is the Fed is about to run out of ammunition. And if we have a few more weeks like the one we had this week, the system will just have to respond because so much will be at stake.

Secretary Paulson, the treasury secretary, is talking to these people on Wall Street all the time, and we know he's getting yelps of pain from them. At some point, the combination of that, the shakiness of the markets, and the political pressure from Democrats is going to make them move.

Aiming to increase confidence

David Wessel
The Wall Street Journal
What the Fed was afraid of, as Bear Stearns went under, there would be a kind of cascading of people refusing to lend to other people and it would be ever and ever harder for ordinary Americans and businesses to borrow.

JUDY WOODRUFF: Jane Bryant Quinn, help us understand the connection between the yelping that David was describing on Wall Street and what real people -- and I mean ordinary Americans, Main Street -- is feeling and will feel down the road?

JANE BRYANT QUINN: Well, they are, obviously, feeling the foreclosure problem. And I do think that the federal government -- this program to help foreclosures hasn't done nearly as much as it should or could, because voluntary efforts are fine, but they don't get a whole lot of mortgages off the books.

I think they are facing -- they're looking at higher gas prices. They are looking at higher food prices. They are looking at recession probably ahead. They are looking at fewer jobs being created now and the possibility of much higher unemployment rate.

So what they're looking at is not a happy situation for themselves. And it is all sort of -- it's a whole domino effect coming from the bursting of the credit bubble that we've had.

We had a tech bubble that burst. We had a real estate bubble that burst. And now this enormous debt credit bubble that we've had in this country is in the process of bursting, and we haven't seen the end of it.

JUDY WOODRUFF: And, David, what's the connection between all that that Jane describes and the Fed moving today to bail out Bear Stearns, as I said, the fifth-largest investment bank?

DAVID WESSEL: Well, I think that, first, just to add to what Jane said, and then the one thing that seems to be overwhelming everything at the moment is that houses are the primary asset of most American families and the value of houses seems to be falling in many communities. On average, they're falling. And that's a pretty rude shock to Americans who are used to just the opposite.

Although it seems sometimes like the Fed only worries about the big guys on Wall Street, the fact is, like it or not, that we all have a stake in the stability of the financial system because we're all dependent on it, if only to get our loans, our credit cards, our mortgages, our student loans.

So what the Fed was afraid of, as Bear Stearns went under, there would be a kind of cascading of people refusing to lend to other people and it would be ever and ever harder for ordinary Americans and businesses to borrow.

So they're trying to keep the credit machine going, albeit at a somewhat slower pace than the one that Jane referred to as a bubble. And that's really what they're trying to do, because the economy, the lifeblood of the American economy, is credit, the ability to borrow, individuals, homeowners, and businesses. And if that stops, then the music stops.

Americans facing classic recession

Jane Bryant Quinn
Newsweek / Bloomberg.com
The dollar going down means that internationally we are getting to be a poorer country, and we are not doing as well as we did in the past. This is going to be a hard thing for Americans to face.

JUDY WOODRUFF: Jane Bryant Quinn, as somebody who studies consumer and consumer behavior, what do you look for next?

JANE BRYANT QUINN: I am looking for, I'm afraid, not a very comfortable time for consumers. I expect that some of them are going to have to start saving more money, which they haven't done in the past because they've always had easy credit, they've always been able to spend, and now they're not going to be able to get as much credit. They're not going to be able to borrow against their homes because of the decline in the equity of their homes.

And so this is going to -- they're facing a retrenchment, because they're spending more on their gas, they're spending more for food, and their incomes are not going up, and they're going to lose some jobs. So we're looking at a classic recession, and consumers are going to have to retrench.

And, you know, Judy, over the long run -- if you look at where America is in the world, relatively speaking, we are getting poorer, because we've been a debtor nation for so long. And the dollar going down means that internationally we are getting to be a poorer country, and we are not doing as well as we did in the past.

This is going to be a hard thing for Americans to face.

JUDY WOODRUFF: A sobering picture we're painting this Friday. Jane Bryant Quinn, David Wessel, thank you both.