JEFFREY BROWN: Indeed, the size of the plan and the high stakes involved have caused that debate to spread well beyond Capitol Hill, and we sample some of it now.
Eugene Ludwig previously served as the comptroller of the currency, the chief national bank regulator. He’s now CEO of the consulting firm Promontory Financial Group.
Allan Meltzer is a professor of political economy and public policy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute.
And Paul Krugman is professor of economics and international affairs at Princeton’s Woodrow Wilson School and a columnist for the New York Times.
Well, Eugene Ludwig, do we need a government intervention? And is this one shaping up as the right approach?
EUGENE LUDWIG, CEO, Promontory Financial Group: Yes, we definitely need government intervention. This is a very serious time for America’s economy and financial system, and we must move swiftly.
The Congress has raised legitimate issues, in terms of sharing, in terms of governance, but I’m confident the American people and the political process can pull together, which we must do now over the next several days, to come up with a good piece of legislation to end this crisis.
JEFFREY BROWN: Allan Meltzer, same question. ┬áIs this a good idea?
ALLAN MELTZER, Carnegie Mellon University: It’s a terrible idea. It’s undemocratic. It’s bad economic policy, and it’s bad social policy. And it has a very little chance of solving the problem in a meaningful way.
JEFFREY BROWN: Well, flesh that out a bit. Is it that we are not in a crisis? Or is it that government intervention of this kind is not the right answer?
ALLAN MELTZER: Well, I’ve listened to governments tell me for 40 years that there was a crisis and the world was going to fall apart if we didn’t do this or that. But there have been a few cases where they weren’t able to do that.
One was the commercial paper crisis in 1970. There have been several others. The world did not fall apart. Last week, we had Lehman Brothers went into bankruptcy. Within three days, most of the assets were sold.
We had AIG turn down three offers to buy the company because they thought they would get a better deal from the government. It turned out they didn’t get the better deal from the government. Now the stockholders suddenly woke up and said — the major stockholders said, “We’d like to buy the company.”
Well, that’s what I think we need to do. We need to get the government’s hand out of this, and let’s see whether we can’t get a market solution.
The market people caused this problem. They ought to be the ones that pay the cost of having it cleaned up.
The right plan for a tough time?
JEFFREY BROWN: And, Paul Krugman, where do you come down? Do we need government? And is the approach on the table the right one?
PAUL KRUGMAN, Columnist, New York Times: Yes and no. I mean, we need a rescue. Major financial crises always end up being resolved with a government rescue.
The savings and loan crisis in the United States, the financial crisis in Sweden in the early '90s. Japan finally started to climb out of its hole a little bit with a government rescue, but not this one. I mean, this is extraordinary.
You know, normally a government rescue is the government essentially takes control of the troubled firms, takes off their bad assets, recapitalizes them, and sells them. In this case, Paulson is proposing to just buy the stuff off with no transparency about how it's going to be done. Incredible power grab.
It's really very important to understand the dynamics here, that the initial draft from Treasury gave Paulson complete authority and complete immunity from any future, you know, second-guessing of his plans. And he's sort of made it worse, actually.
In this morning's testimony, he said, "Oh, we want, you know, we want oversight," but the draft very explicitly denied oversight, so he is not coming across as dealing in good faith. I'm for a rescue, but this is a terrible plan and...
JEFFREY BROWN: So, well, let me...
PAUL KRUGMAN: No go. No way.
JEFFREY BROWN: Well, let me stay with you then. What would you like to see in a plan that would better protect taxpayers?
PAUL KRUGMAN: I think, if we're going to be essentially providing public capital for firms, essentially what we're calling for is we're -- this is calling for Uncle Sam to be what, you know, in finance we call a white knight, somebody who comes in with capital to rescue a firm that doesn't have enough capital.
I think Uncle Sam does need to be the white knight, but the white knight always, you know, gets a piece of the pie, gets ownership.
Actually, what happened with AIG I thought was OK. The federal government, you know, rescued the firm, kept this very important institution operating so the markets didn't fall apart, but it got an 80 percent ownership stake.
When we took -- when the S&Ls failed, the federal government seized them, took ownership.
So some -- and there are mechanisms proposed. Chris Dodd had a very good proposal out. You know, you can quibble with the details, but where, in return for the bailout, we give equity warrants that give us a taxpayer stake. As it stands right now, it's an uncontrolled, no oversight, just plain giveaway to Wall Street. No go.
JEFFREY BROWN: Eugene Ludwig, come back in here. You were praising it in the beginning. What's the response to what we just heard?
EUGENE LUDWIG: Well, no, I wasn't praising it. I was saying that we have a crisis that we have to deal with. We have to move forward and get a bill done.
The comments that the Congress have raised are legitimate, that Mr. Krugman just raised, I think are thoroughly legitimate to be considered.
Both sides have to come together, as we always have in America, and get something done. The issue here is that we've got sides that have to be brought together. We've got to move this forward and move it forward swiftly.
Fairly valuing bad assets
JEFFREY BROWN: Let me ask you, stay with you. One of the issues that we heard raised in the hearing was the question of whether anybody can fairly value the bad assets out there, how this would work mechanically. What do you think? How should that work?
EUGENE LUDWIG: The plumbing can clearly be taken care of. This is not the first time we've dealt with these kinds of mechanisms or crises. We've had the RFC in the Great Depression, and the Home Owners' Loan Corporation, and the RTC.
There have been legitimate questions raised, and we've got to come together on a compromise package that's going to satisfy the legitimate questions of Congress. They're right to have looked at this closely. The administration's package is not perfect by any means.
But I'm confident over the next several days and weeks we can come together with a package that works and get it done. The world is looking at America to show the kind of resolve that we need to move forward.
If we don't, this is going to hit pockets in American mainstream. People are going to lose their jobs. People don't have access to credit. This affects all of us.
Sure, I don't want to pay for this, like every other American, but we've got to bring our people together and come up with a bill that works. And as I say, Congress has raised important and legitimate questions. I know they'll be dealt with.
PAUL KRUGMAN: Well, can I break in here? The problem is, if we value these assets fairly, that's a bad formula, because if we value them fairly, it turns out that a lot of financial institutions are probably bust.
The problem is that we actually have to funnel money into these institutions, which means that there has to be a quid pro quo. It's not that there's a market price and, if we can find that market price, we settle it. That's exactly missing the point.
The problem is the huge losses on mortgages, because of the bursting of the housing bubble, have left us with an undercapitalized financial system.
The federal government is going to have to put money into that system, but it has to do that in the way that at least gives taxpayers a reasonable interest in what happens. That hasn't come from Treasury.
I don't think this is going to get done in just a couple of days, because there is a long distance between what came out of Henry Paulson on Friday and what any reasonable solution looks like. We'll get a solution, but it's not going to be overnight.
JEFFREY BROWN: All right, let me let Allan Meltzer back in here. Go ahead.
ALLAN MELTZER: Yes. I don't want to join a debate about different ways of picking the public's pocket. I think, if they're going to do something -- and I don't think that we really need to do anything. I've heard these stories over and over for 40 years. You know, maybe there will be a crisis.
But despite all the talk, Main Street is not doing so badly. And the fact is that they've been predicting disaster since January. It hasn't happened.
And if they're going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think -- that's an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them.
People paid back the loans. They weren't allowed to pay dividends until they repaid the loans. They weren't allowed to take bonuses until they repaid the loans. I think that's the way -- if we're going to do this, then that's the way we should do it.
Putting limits on executive pay
JEFFREY BROWN: Professor Meltzer, are you concerned about rewarding the people who caused this, the trouble? Is that part of this? I mean, one of the questions or issues on the table we just heard on the tape is whether we should use this opportunity to put limits on executive pay, for example.
ALLAN MELTZER: Well, I don't want to get into the distribution of income arguments that are so prevalent in the Congress. I'm against this mainly because it seems to me this is private interest activity at the expense of the public interest.
I mean, Mr. Paulson can talk about all the things that are going to be good for Main Street, but the fact is that Main Street is going to incur a huge debt and a big loss, for the reason that Paul Krugman just mentioned, because most of these assets are not worth much.
Well, let's do loans, which they have to repay with interest, and let's see what happens.
I know that many people think it can't happen. But, look, today, Morgan Stanley sold 20 percent of its company to a Japanese bank. There's lots of money out there, liquidity. The Chinese have it. Others have it. They've come in.
If the government steps aside and says, "Solve this problem," then we'll see more of that activity and people will begin to do it.
Merrill Lynch sold itself. It sold out some of its assets. It got 22 cents on the dollar. It's correct to say nobody knows how to value these things, and they won't know how to value them until the housing price reaches a bottom or is expected to reach a bottom, because you can't value the mortgages until you know what the underlying asset, which is the house, is worth. And nobody knows that.
JEFFREY BROWN: Mr. Ludwig, what do you think about the calls in Congress that we hear for limiting executive pay or taking more punitive actions? Is that the kind of thing that is -- we should wait to have that discussion and move ahead now on the package that Secretary Paulson is talking about, or is that legitimate to be discussed right now?
EUGENE LUDWIG: It's legitimate to be discussed right now. There are legitimate -- I have a great deal of respect for the leadership in the Congress. And they've raised legitimate and important issues to be discussed and debated and dealt with.
There's a sharing issue, and there's a governance issue principally. They're very important issues. And Mr. Krugman I think pointed them out well.
But we must move with haste and deliberate effort here to get this crisis solved and get it behind us. It's in the interests of the American people, and we'll all be better for it.
The longer we let this go, the more it's going to cost the American people, the more it's going to affect people's jobs, people's homes. We just simply can't tolerate waiting.
JEFFREY BROWN: Mr. Krugman, what...
ALLAN MELTZER: I don't believe that for a minute. I don't believe that for a minute. I mean, we've been hearing that scare talk for a long time. And there's just nothing to back it up.
What happens is companies are being sold, as Morgan Stanley was sold. Other companies, like Lehman Brothers, they were sold. If the government doesn't do this, there will be other people in there buying up these assets.
PAUL KRUGMAN: I'm going to -- I mean, I'm actually agreeing with Alan on a fair number of things. I mean, I think there are real problems.
History, scale of the crisis
JEFFREY BROWN: But do you think something needs to be done still?
PAUL KRUGMAN: Something needs to be done. This is looking a little bit -- I'm going to do the scare talk here. This looks a little bit like a high-tech 21st-century version of 1931 of the great banking panics that brought on the Great Depression. And nobody wants to see a repeat of that.
That said, that doesn't mean that we have to do now, now, now, this week, exactly what Hank Paulson says.
So it's worth taking some time to do it right. And we should say that the most critical credit market, which is the home mortgage market, has actually already been rescued. We just nationalized Fannie and Freddie.
And so I think we have a little more leeway. I think that we need to cool this a little bit and say, "Yes, OK, we're going to do this, but it doesn't have to be this week."
EUGENE LUDWIG: Well, I fundamentally agree with Paul...
ALLAN MELTZER: I agree with -- I agree with Paul.
EUGENE LUDWIG: ... in that things have to be done, but we've really got to get -- we've really got to get moving. There are legitimate concerns. They have to be dealt with. I'm confident the Congress is capable of dealing with it, with these issues. We've just got to move along and move along as swiftly as we can.
PAUL KRUGMAN: But we need some better faith dealing -- we need some better faith dealing from Treasury. They came on. They screwed this up pretty badly by coming on with this power grab.
And we still haven't had, you know, clear -- I thought there was a fair bit of disingenuity. Paulson was still not being clear this morning about what he's actually doing, how this is all going to work.
I think the burden of proof rests very much on Paulson, and the Treasury, and the Bush administration.
JEFFREY BROWN: Let me ask Professor Meltzer...
ALLAN MELTZER: I agree with Paul.
JEFFREY BROWN: ... what's fascinating and, you know, kind of scary for people at home is just the notion that nobody really seems -- nobody really knows, so it's a bet either way. You're saying we shouldn't take this kind of action, but what's the alternative?
ALLAN MELTZER: The alternative, if we're going to do something, it is to put them in the responsible position of borrowing the money and having to pay it back with interest. That's how...
JEFFREY BROWN: But their answer...
ALLAN MELTZER: ... we could go a long way to protect the interests of taxpayers.
JEFFREY BROWN: But their answer is that the repercussions are on the rest of us. That's what we've been hearing.
ALLAN MELTZER: Well, you know, I just don't believe it. It may be true. It may turn out to be true this time. I've heard it now for 40 years over and over again.
Whenever they want to make a grab of this kind and bail out their friends, that's what they tell us. Well, let's try, and test it, and see whether it really is that bad.
In a democratic country, we discuss these things thoroughly. We air the problems. We listen to various points of view. And we take our time about making decisions of this magnitude.
JEFFREY BROWN: And, Mr. Ludwig, briefly, you're saying we have to act quickly?
EUGENE LUDWIG: I think we have to act with deliberate speed. I think we have to consider all these important issues.
Believe me. I think the leadership of the Congress has raised important issues that must be dealt with and dealt with in the interest of the American people.
There's got to be fair sharing. We've got to have governance. But at the same time, we ought to move ahead and get this problem behind us. We always pull together at the...
ALLAN MELTZER: May I just say one last thing?
JEFFREY BROWN: Well, OK, make it very briefly.
ALLAN MELTZER: Very brief. No one, no one has said this will solve the problem. No one has said it will solve the major problem in housing and finance.
JEFFREY BROWN: All right. We do have to leave it there. I'm sorry, but I want to thank all three of you. Thanks very much.