TOPICS > Economy

Sweeping $700 Billion Financial Rescue Wins Final Approval

October 3, 2008 at 6:15 PM EST
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The U.S. economy faced fresh troubles Friday as President Bush signed a $700 billion bailout bill. Analysts weigh the economic picture and Paul Solman recaps week's events.
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JEFFREY BROWN: Even as the controversial bailout package became law today, there were more signs of economic weakening. Nationally, as we heard in the news summary, the loss of nearly 160,000 jobs last month. And from California, impact from the credit squeeze, as Gov. Schwarzenegger warned the U.S. Treasury that his state may need to borrow $7 billion just to pay for day-to-day operations.

More on all this now from Chris Hoene, director of policy and research at the National League of Cities, an advocacy group for municipal governments across the country, and Mark Zandi, chief economist at Economy.com, an economic consulting firm, who joins us from Philadelphia.

Well, Mark Zandi, break down the jobs report for us. How broad was the damage?

MARK ZANDI, Chief Economist, Economy.com: It was broad. It was bad. We lost 160,000 jobs. We’ve lost 760,000 jobs since the beginning of the year.

In September, the job losses were very widespread — construction, manufacturing, transportation, retail, financial services, information services, professional services — really, it’s easier to list industries that added to payrolls, and that would include health care, educational services, and government. Other than that, there was just job losses.

JEFFREY BROWN: The actual unemployment percentage stayed the same. Explain that one again for us.

MARK ZANDI: Well, it did jump very significantly in August, and I think it was just a bit of temporary respite. I think we will see the unemployment rate rise quite significantly in the not-too-distant future in the months ahead.

Credit squeeze hits states hard

Chris Hoene
National League of Cities
In Kansas City, Mo., they've put on hold $200 million worth of water financing bonds because they couldn't get access to the credit in the markets.

JEFFREY BROWN: Now, Chris Hoene, I cited California's action today. What's California's problem? And how are other states and cities feeling it?

CHRIS HOENE, National League of Cities: Well, Governor Schwarzenegger's warning actually illustrates three major concerns for state and local governments that are related to what's happening with the financial crisis right now.

The first is just short-term access to cash, much like a corporation or a small business needs access to money to pay payroll or to cover projects or to handle day-to-day operations, states and local governments need that same kind of money, and that's dried up currently, and that's a major concern.

A second more medium-term concern is that what's happening in the market is curtailing cities' and states' ability to borrow money for ready-to-go projects, so for infrastructure, roads, bridges, the types of things that they put major amounts of money into, and investments that relate to jobs and income, those are also at risk currently.

Speaking much more broadly, the governor's statement and what's happening for state and local governments and what's happened today with the passage of the bill in Congress is about just getting the economy moving again.

Most of what states and local governments need to happen here is for income property sales, the sources of their local tax revenues, the functions of government need to start moving again, and those are related to what happens in the economy.

JEFFREY BROWN: Are there specific examples of projects that are already being curtailed or cut back or can't get off the ground?

CHRIS HOENE: Sure. There's examples all over the country.

Just to cite a few, in Kansas City, Mo., they've put on hold $200 million worth of water financing bonds because they couldn't get access to the credit in the markets.

Counties in North Carolina, Wake and Durham County, had trouble getting access to funds and have put projects on hold. Infrastructure improvements to airports in Chicago and Miami, infrastructure improvements to roads in Washington, D.C., all of that has been put on hold currently, and it mostly has to do with access to credit.

JEFFREY BROWN: Mark Zandi, where else do you see the credit squeeze hitting, in terms of businesses, for example? What kinds of businesses? What kinds of loans?

MARK ZANDI: All kinds of businesses. Big businesses, the biggest in the nation are having trouble issuing short-term commercial paper, which is what they use to finance a lot of their activities.

Small businesses, midsized businesses are getting credit lines pulled by their very nervous bankers.

And this is having an immediate impact, and many businesses are now thinking about layoffs, certainly cutting back on investment projects. Anything and everything that they do is now in jeopardy because of the lack of credit.

JEFFREY BROWN: And what about individuals? In what ways are individuals being hit?

MARK ZANDI: And, of course, individuals are getting hit hard, as well. If you don't have a pristine credit score, then it's very difficult, if not impossible, to get any kind of loan, certainly a mortgage loan, vehicle loan, even student loans.

A lot of other folks have home equity lines of credit. There might have been $10,000, $15,000 and the banks are pulling those credit lines. They no longer have them. And everyone is being affected from top to bottom.

JEFFREY BROWN: Just staying with you, Mark, are there different regions being hit in different ways?

MARK ZANDI: Well, the hardest hit areas are the areas where the housing market is the worst. That would include places like California, Arizona, Nevada, Florida, parts of the Northeast, like Providence, around Washington, D.C., and, of course, the industrial Midwest, where the auto industry is getting hammered and people are under a lot of pressure, so Michigan, Ohio.

These are the areas where the economic problems are their deepest and the credit has been most restricted.

JEFFREY BROWN: Is that what you're seeing, in terms of the effects on cities?

CHRIS HOENE: Yes, almost the exact same thing. We do a major study of city finances every year that we've just come out with in the last two weeks, and our results show that cities in the West, Southern California, Nevada, Arizona, places like Florida, the industrial Midwest, they're all struggling.

And it's mostly related to what's happened in the housing market. The housing market drives property tax revenues. Property taxes are the major source of local government revenue in this country. And so what we've been seeing for the last year, year-and-a-half with housing values is now starting to take hold in cities.

A broad effect on the economy

Mark Zandi
Economy.com
And for households, you know, I think this crystallizes in their minds that they are worth a lot less than they were a year ago and they will be worth a lot less for a long time to come.

JEFFREY BROWN: Now, the jobs numbers that we started this discussion with, that goes to your number three, I think, the broader economic impact on cities and states. How do the job numbers play into the budgets and revenues of cities?

CHRIS HOENE: Well, in a couple of different ways. Most directly, there are a number of cities around the country, particularly larger cities in this country, that have access to a local income tax.

And so what happens with people's jobs, their wages, their income, their sense of wealth affects those tax revenues. So for those cities in particular, there's going to be a direct effect.

But there's also a broader effect on the economy, in terms of people's sense of wealth and what happens to the choices that they make in the economy. So do they feel like they can sell their home? Do they make major purchases?

And do they feel like their income is at a level where they can make those decisions? And when they don't, economic activity stops, and the sources of revenue -- sales taxes, property taxes, income taxes -- all go down at the same time.

JEFFREY BROWN: And, Mark Zandi, that sense of confidence, of well-being no doubt goes to retailers and as we look for -- look ahead to the end of the year, Christmas season and all.

MARK ZANDI: Yes, you know, the other major fallout from this financial panic is it's a body blow to confidence. You know, business people had been quite resilient up to this point. They'd come into this in pretty good financial shape.

And, you know, they were laying off some workers, but nothing like we'd seen in past recessions. But, you know, I think with what they are suffering through now, I think they're going to pull back, and we're going to see very significant layoffs and cuts in investment.

And for households, you know, I think this crystallizes in their minds that they are worth a lot less than they were a year ago and they will be worth a lot less for a long time to come.

And when you believe that, you change your behavior. You stop doing lots of the things that you were doing before and, of course, that's a big hit to the economy.

So this hit to confidence, I think, is very serious and why we're going to have significant economic problems well into next year.

JEFFREY BROWN: And you're expecting, Chris Hoene, that other cities and states like California will be coming to the federal government for potential help?

CHRIS HOENE: Yes, I think, as we talk about going into next year, we talk about the potential for stimulus packages coming out of the federal government, aid to states, aid to local governments will have to be a part of that equation.

I think we also have to recognize that what's happening in the economy now is likely to play out over the next two to three years in cities. There's always a bit of a lag for states and local governments in terms of what happens in the economy and when it takes effect in their revenues.

What we're seeing today is...

JEFFREY BROWN: And why is that, exactly?

CHRIS HOENE: Well, for cities in particular, it's about property taxes. And so the assessments that you pay on the value of your property, those are typically one to two years behind what's actually happening in the market.

So the property tax collections that we're seeing today were based on what we were seeing -- what was actually happening with markets in the summer of 2007, for instance.

So if you think that what's happening with financial conditions nationally today, that's going to be playing out in 2009, 2010, and to the extent that the economy continues to struggle, maybe even longer. So it's going to be some tough sledding for cities and states for the next couple of years.

Rethinking how markets work

Paul Solman
Economic Correspondent
That's what confidence is. That's what an economy is based on. I trust you to pay me back if I lend you money. Same for you to me. Same for every bank to every other bank.

JEFFREY BROWN: All right, Chris Hoene and Mark Zandi, thank you both very much.

MARK ZANDI: Thank you.

JEFFREY BROWN: And now to an end of another wild week "Where are we now?" conversation with our economics correspondent, Paul Solman.

Paul, you recently on the program did a piece on the breakdown of trust. You were talking about credit, what credit means.

PAUL SOLMAN, NewsHour Economics Correspondent: Yes. Yes.

JEFFREY BROWN: Is that what we're seeing now?

PAUL SOLMAN: Yes, you know, I've been saying that on this program every time we've had a crisis back into the savings and loan era, credit from the Latin credere, to repeat myself yet again, "credibility."

That's what confidence is. That's what an economy is based on. I trust you to pay me back if I lend you money. Same for you to me. Same for every bank to every other bank.

JEFFREY BROWN: The individuals, the banks, the cities, we just heard about, all asking for a loan.

PAUL SOLMAN: Well, just think, if it's an economy that runs purely on cash, I mean, you have to trust the other person. And that's what's vanishing here.

We've heard a lot about LIBOR, the London Interbank rate. That's how much banks charge each other in Europe for overnight loans. That number has skyrocketed.

How could a bank, exactly like the bank you're going to lend money to, not be the bank you're going to lend money to is exactly like yourself -- sorry -- how could that not -- how could it go bankrupt overnight? But that's what people are worried about.

And we heard earlier in the week about the TED spread. That's the treasury to euro dollar spread, TED. That's LIBOR, the London Interbank rate, diverging from the risk-free Treasury rate, because it's very risky in banks' view to lend money to each other. How much less trust could you have?

JEFFREY BROWN: So we are in the midst of this, but can we say how this happened, why this happened? I mean, markets are supposed to work. Markets are supposed to clear. Why is this happening?

PAUL SOLMAN: Well, you know, market skeptics have always said "market failure." You know, that's a common phrase. Free market fundamentalism does not work.

I talked to Bob Glauber, who ran the Resolution Trust, this morning. And he's a finance professor, a regulator. He characterized himself as deeply depressed.

Deeply depressed why? Because what he believes in -- markets clearing, markets working, markets managing by themselves -- doesn't seem to work. And it's sort of a repudiation -- I used that word with him -- repudiation of what a guy like him and thousands of others like him have been teaching all these years.

JEFFREY BROWN: So in the midst of -- is a way of looking at what's happening in Washington and Wall Street this week, it's in the midst of this kind of a breakdown that we're rethinking how markets work, and I guess how governments role in the markets work?

PAUL SOLMAN: Yes, I mean, rethinking it every minute, every moment, rethinking it after the bailout passed today. Lehman Brothers, don't bail out Lehman Brothers. Let the market punish the mal factors, the guys who took too much risk.

And then, after Lehman Brothers went down, suddenly markets seized up even more, credit markets in particular. And then people began to wonder, "Gee, maybe we should have bailed out Lehman Brothers." Right afterwards, we bailed out the biggest insurer, AIG. I mean we nationalized an insurance company in this country.

So, yes, we're making it up as we go along. We're rethinking it as we go along every minute. And, you know, I hope it's over -- I wish it were over -- so do we all -- but there's no indication that it is.

Sweeping changes ahead

Paul Solman
Economic Correspondent
But as member after member said, what else do you do at this point? Paul Krugman, the liberal columnist in the Times today, said it's a stinker, he said, characterizing this bailout, but we'd better do it.

JEFFREY BROWN: You know, the most extraordinary thing, I guess, as I was watching the bailout packages that went through the last couple of weeks, and we saw it again just now in Kwame's piece, the people who back it, I mean, the supporters, they don't like it. They don't like any part of it. They're bad-mouthing it as they go to vote for it.

PAUL SOLMAN: Well, yes, I mean, you saw Nadler even saying this is a bad package, but it's the best we got.

Look, you're nationalizing banks. You're nationalizing insurance companies. You're bailing out lenders instead of borrowers. You're going down a socialist path. I mean, what is socialism, if it isn't more government involvement in the economy? What's to like, from the point of view of somebody who believes in markets?

And so, of course, everybody sort of backs off. And constituents are angry. And so they don't want to, you know, go in whole hog.

But as member after member said, what else do you do at this point? Paul Krugman, the liberal columnist in the Times today, said it's a stinker, he said, characterizing this bailout, but we'd better do it.

JEFFREY BROWN: So in terms of what comes next, I guess maybe the question is, what questions are still out there? As we look forward, what do we watch for next?

PAUL SOLMAN: Well, how much do we become a socialized economy? I mean, say, the United States is maybe 30 percent of our economy is government, more or less, then markets, 60 percent.

Are we Scandinavianizing the American economy? And to what extent and how fast? And, of course, the scarier question yet, which is, will it work?

I mean, can you -- can you do that in an economy like this? Can you do that in a world economy?

In 1990, Sweden nationalized its banks, not for a very long time, re-privatized them, made money on the deal. But here we're talking about insurance companies, hedge funds, everybody...

JEFFREY BROWN: Now they have to go in and figure out and look at all those bad loans and see what they're really worth.

PAUL SOLMAN: Well, it's the bad loans, but it's also -- suppose people are holding the bad loans, but they're bankrupt, or they're going to be bankrupt, Ford, General Motors. I mean, I don't mean to scare people. I have no idea what's going to happen. Unfortunately, nobody else does, either.

But it's the government -- the government is known as the lender of last resort, or the Fed is, last resort. I mean, and that's what we're doing.

Now, government can do that. Government has the infinite ability to do that, and our government is doing it, and it's a very good thing that our government can mobilize and do it, as opposed to be paralyzed like Japan was, say, in the '90s.

But it's a huge, huge change. And you can understand why it would be controversial.

JEFFREY BROWN: All right, Paul Solman, thanks again.