JUDY WOODRUFF: Now the big questions concerning bailouts. Just weeks after the government agreed to provide more than $200 billion to insurance giant AIG and mortgage giant Fannie Mae, both companies are seeking more money.
Yesterday, the government announced that it would make even more money available to AIG and under more favorable terms.
Separately, Fannie Mae warned that it, too, may need more cash.
But what does all this say about the wisdom of these bailouts? We get two views. Joseph Stiglitz is professor of economics at Columbia University. He was chairman of President Clinton’s Council of Economic Advisers. He shared the 2001 Nobel Prize in Economics.
And Peter Wallison was general counsel of the Treasury Department in the Reagan administration. He’s now a fellow at the American Enterprise Institute.
Thank you both for being with us. Well, it looked like a lot of money at the time. There was a big fuss made over all this. But what’s happened, Joseph Stiglitz?
JOSEPH STIGLITZ, Columbia University: Well, the hole in these institutions was much larger than the Treasury admitted at the time. I think, actually, a lot of people in the financial markets understood that we were just putting on a down payment, that the Treasury didn’t want to admit how deep the hole was either to itself or to the American people.
And what we are seeing now is the fuller price tag. We still don’t know what the full price tag will be.
JUDY WOODRUFF: And, Peter Wallison, is that it, that we just didn’t know how deep the hole was?
PETER WALLISON, former general counsel, Treasury Department: I don’t think that it was that the Treasury Department knew and didn’t tell. I think nobody really knows the size of these holes because they depend very much on the value of mortgages, the value of homes.
And as mortgages and homes decline in value, the losses become more evident. Fannie Mae and Freddie Mac are going to have enormous losses. I think it’s a different situation with AIG, and their losses will be contained, and they will eventually come out of it, but Fannie and Freddie are going to suffer tremendously.
Meeting obligations to firms
JUDY WOODRUFF: Joe Stiglitz?
JOSEPH STIGLITZ: Can I just say that it was well known among most housing experts that we had had a housing bubble and that there was going to be significant reductions, falls in the price of housing.
Yes, there were some people who wanted to paint a rosy scenario, wanted to believe that, if you could just talk up the market, things would -- the housing prices would stop going down.
But realistic scenarios realized that we were only a part of the way down in the readjustment or realignment of housing prices to more reasonable levels.
Now, of course, we don't know -- we can't be sure about this, but what I think most people were forecasting, housing experts like Shiller at Yale, were very clear about what was likely to happen, not for certain, but most likely, and those forecasts turned out to be right.
JUDY WOODRUFF: Well, if that's the case, Peter Wallison, how did the number that was arrived at, the original set of numbers for Fannie and for AIG, how did those come together?
PETER WALLISON: Well, actually, there was no reason to estimate more than you expected the losses to be, and there was nothing about the initial estimates that were inconsistent with enlarging the costs as the losses became more apparent.
That's what's happening here. This is quite reasonable. I don't really see what the complaint is.
We have to meet the obligations of these two institutions, well, Fannie and Freddie on one hand and then AIG on another, for entirely different reasons. And I think the government is proceeding in doing that and doing it in both cases in the right way.
I'm a little surprised that more money has not been advanced up to this point to Fannie Mae and Freddie Mac. They can have a tremendous impact on reforming, and revising, and refinancing mortgages all across the range in the United States, and that's the key problem.
We have to focus not on the bailouts, but on the effect of what the various institutions, such as banks and Fannie Mae and Freddie Mac, can do to make mortgages more affordable for people, as your first group were talking about.
That is the key problem in our economy today, and we have to be focusing on that.
Taxpayers bear the costs
JUDY WOODRUFF: Joe Stiglitz, go ahead.
JOSEPH STIGLITZ: I agree very much. The focus should have been on how to maintain the flow of money, credit, money to mortgages, but that's where the fatal flaw occurred.
One could have financially restructured Fannie Mae and Freddie Mac, made the bondholders in these institutions bear -- convert them to equity investors -- in other words, a normal corporate reorganization. The same thing is true of AIG.
So effectively we've been doing is using taxpayer money to bail out creditors and to a lesser extent, the investors, because they've actually had to pay a significant price. But this is not normal capitalism.
Normal capitalism is you take the profits, but you also take the losses. This is ersatz capitalism, where the private sector gets the profits and the American taxpayer walks off with the losses.
JUDY WOODRUFF: Peter Wallison, what about that analysis?
PETER WALLISON: Yes, well, I think actually that is true of Fannie Mae and Freddie Mac. And that's something that many people have been complaining about for many, many years. That was backed -- these two entities were backed by the government. As a result...
JOSEPH STIGLITZ: They were never backed by the government. Since 1968, they were privatized.
PETER WALLISON: They were backed by -- please, may I finish? May I finish? They were backed by the government. And as a result, they were able to take tremendous risks.
And now that they have suffered tremendous losses, we have to take care of that because of the policies that the government followed in the past.
Now, the idea that we would take Fannie Mae and Freddie Mac's debt and convert it into equity would have been a catastrophe, because these -- the debt of Fannie and Freddie were held by thousands of banks all over the United States and all over the world.
And if it had been converted into equity, those banks would now be in default. They would be gone. And that would make our financial system and our financial crisis even worse.
The government did exactly the right thing by taking over Fannie and Freddie and saying to the people who had lent the money previously that that was money good, the government was going to keep paying the debts of Fannie and Freddie, because that is sustaining the health of the financial system.
Flaws of deregulation
JUDY WOODRUFF: The question, it seems to me tonight, is, should these have happened in the first place? And where should the line be drawn?
And I ask, because you've got others now standing in line. The auto industry, Joseph Stiglitz, is out there now looking for government help. A company like American Express is getting in a position, we read today, to ask for help. Where should the line be drawn?
JOSEPH STIGLITZ: Well, what is so clear that, in the case of the financial sector, we made some fundamental flaws in this movement to deregulation, that we allowed the banks to put money in risky places. We didn't supervise in the way that we should have.
And we're bearing some of the consequences of that major failure in deregulation that began under President Reagan.
Now, in the case of the automobile industry, it's another separate set of issues. My own feeling is, again, we ought to use the bankruptcy code. These companies ought to go bankrupt, be reorganized.
That doesn't mean the company ceases to exist. What it means is you restructure the finances. Once you wipe out some of bad debt -- yes, the government will have to assume some protection for pension funds. It won't be costless, but it will allow them to get a fresh start -- it's the reason we have a bankruptcy code -- and begin the process of restructuring America's manufacturing sector with some degree of accountability.
The problem is that the CEOs in the financial sector and these motor vehicle companies have not done a good job, and they should be held accountable.
In the automobile industry, they bet on low oil prices. They ignored the risks of global warming. And the result of that is they designed cars that were not appropriate for the world as we have it today.
Avoiding future collapses
JUDY WOODRUFF: Peter -- I was just going to interrupt just a second to get back to Peter Wallison, because essentially what Joe Stiglitz is saying is Chapter 11 bankruptcy, reorganization?
PETER WALLISON: Well, that could work. I'm not arguing that all companies ought to be bailed out, but we have to recognize that the economy, the financial world and the world financial system is in a very, very fragile state.
Actually, Lehman Brothers could have gone into Chapter 11. But when it did fail, it caused a tremendous freeze-up throughout the world in all financial lending. So we have to be exceedingly cautious about looking at these things as though we can simply let companies die in these circumstances.
This is -- oddly enough, I, who would ordinarily be in favor of having as many failures as possible, simply because we want to be sure that only good managers survive, believe now, after seeing what happened with Lehman, that we have to be exceedingly cautious about that in order to maintain the confidence of investors in our financial system.
It's a very different situation, of course -- there's a different situation with the automobile companies. We're not talking about investors there.
But if we are talking about companies like AIG and other large financial institutions, every time one of those fails, everyone looks at all the others and says, "Am I in trouble? Is this company that I'm invested in also going to be going out of business shortly?"
And that's the kind of thing we have to avoid.
JUDY WOODRUFF: Joe Stiglitz, Peter Wallison, thank you. These are complicated questions, and I know we're going to be coming back to them. Thank you both.
PETER WALLISON: Thank you.