RAY SUAREZ: The past two weeks have seen some extraordinary and unprecedented moves by the government to deal with that crisis, and there may be more to come.
For some perspective, we turn to two people who’ve helped manage the economy in senior government posts. Alan Blinder was vice chairman of the Board of Governors of the Federal Reserve and a member of President Clinton’s Council of Economic Advisers. He’s now a professor of economics at Princeton University and an adviser to Sen. Barack Obama.
And Peter Wallison was general counsel of the Treasury Department in the Reagan administration. He’s now a fellow at the American Enterprise Institute and an adviser to Sen. John McCain.
Professor Blinder, let me start with you. What role should political leaders and their appointees play in calming what may turn into a panic?
ALAN BLINDER, Former Economic Adviser to President Clinton: Well, I think you’ve got many roles. The first is getting out there, out front, saying something, trying to restore confidence, explaining to people what the government’s doing and what, indeed, it might do, and why. The why is pretty important.
We’ve had not very much of that from President Bush, as you know. We’ve had more from Secretary Paulson, but still very much not enough.
But talk’s not enough. The government’s going to have to do something. It’s been proceeding on sort of an ad hoc basis, one company this, one company that.
I think people are not really perceiving a pattern there. And I think the time has come to do something major, something that looks like it’s going to put up a levee to stop the flood.
Role of government leadership
RAY SUAREZ: Peter Wallison, what is the role of government leadership at a time of economic crisis? And have we seen it in the past week?
PETER WALLISON, Adviser to Sen. John McCain: Yes, I think we have seen it, actually. These choices that are made by people at the Treasury Department and at the Federal Reserve are made for the purpose of getting our economy back in a stable condition.
Right now, we have a terrible crisis of confidence. Investors are afraid that many firms are going to fail. And as a result, they are on the verge of pulling their money out of these investments.
And what, I think, Secretary Paulson and Chairman Bernanke are trying to do is say to investors, "Hold on a second. Hold on. Think this through. These companies are not insolvent."
This panic can -- is the sort of thing that can be stopped if people will just stop for a minute and think about the excellent financial condition in which the Goldman Sachses and the Morgan Stanleys and a number of banks are in together.
If everyone who is an investor or a lender runs for the door at the same time, no financial institution can survive. So the objective here is to provide enough cash and a sense that the government is standing by, if necessary, so that investors will stop and realize that they ought to look at this thing more rationally.
RAY SUAREZ: More specifically, what's the president's role? You heard Professor Blinder suggest that President Bush has not, in his view, lived up to it. What have you seen?
PETER WALLISON: Well, I've seen the president make these statements, but he's backing his secretary of the Treasury and the chairman of the Federal Reserve, and, in fact, he should. They are the experts.
This is a financial market problem. This is not actually an economy problem. The real economy has grown 3.3 percent in the last quarter. It's an important fact to know. Our economy is doing reasonably well, despite the fact that there have been some losses of jobs.
The real crisis is in the financial economy. And the two people who are handling this -- Bernanke and Paulson -- are two of the nation's greatest experts in this. Both of them have spent their lives -- one is an economist and an academic, and the other as a person actually functioning in the market -- dealing with the problems in markets.
So we're fortunate to have those people there. And the president can't do much except rely on the experts in a case like this.
RAY SUAREZ: Well, professor, Chairman Bernanke and Secretary Paulson are on the Hill tonight talking to congressional leaders about the possibility of creating a new entity that would help clean up the debt crisis. Is that the kind of leadership that actually -- I mean, the markets today responded very quickly to word of that meeting. What do you think?
ALAN BLINDER: I think we need it. Now, it can take a number of forms and, indeed, it may be more than one institution.
I've been saying for a long time, going back to January, that it looks like we are going to need something like, say, something similar to the RTC that cleaned up the savings and loan debacle. It wouldn't be exactly the same because the details of the two are quite different.
I also think we need to take much bigger steps than we did now, although the Frank-Dodd bill that passed in July was a very important step forward to stem the wave of foreclosures. When you get foreclosures, value is destroyed. That then infects the securities.
Similarly, when the securities are infected, that feeds back, because you can't get financing from housing. That helps beat down housing values.
So we're in a very vicious cycle that we need to change. And I think it looks like members of Congress are finally coming around to the view that something big really needs to be done, that tinkering around the edges is just not getting the job done.
Treasury, Fed authorized to act
RAY SUAREZ: Peter Wallison, something big needs to be done? Is this it, creating a new entity to help mop up that debt problem?
PETER WALLISON: Well, I think that would be very premature. We are in a position now where we don't know whether the problems that we've had up to now will extend further into other banks and investment banks.
We ought to watch for the next few weeks to see whether what we've done so far, flooding the market with liquidity -- that is, the Federal Reserve and the world's central banks have all put in a lot of cash, so that banks will not be afraid to lend, they'll have plenty of cash.
And at the same time, we're giving investors an opportunity to think about whether they want to keep pulling their money out of these institutions or whether these are not, in fact, the best places to keep their money at a time when these institutions are actually at a very low ebb and will likely come back in months to come.
So what we want to do, I think, is wait a while and see what happens before we jump into the business of putting the taxpayers further at risk with some sort of large program that buys defaulted or otherwise bad debt.
RAY SUAREZ: Well, one thing that this meeting tonight on Capitol Hill does is really brings Congress into the game. You noted that President Bush has had Chairman Bernanke and Secretary Paulson doing a lot of the heavy lifting this week, but they're appointed rather than elected officials.
Is there a problem with that, having people who were not given their jobs by voters really putting taxpayers on the hook for -- those same taxpayers -- on the hook for perhaps hundreds of billions of dollars?
PETER WALLISON: Well, I think we have to remember that they are acting under authority from Congress. I mean, they are not acting on their own cuff or with their own responsibilities.
The Federal Reserve has the authority to make loans in unusual and exigent circumstances, and it has been doing that. It's been doing that for many, many years, just not as often as it has had to do it during this recent financial crisis.
So we're not talking about unelected people making decisions. We're talking about people who are running major institutions of our financial world who have the authority to make these decisions and are going ahead and doing it because they believe that the American people would be better off if we can stanch this thing and stop this thing right now, get investors calm again, let them think about it carefully, and not go ahead with a program that we might regret in the future.
RAY SUAREZ: Professor Blinder, what about you? Earlier in the program, Speaker Pelosi was wondering out loud whether this was appropriate for appointed rather than elected officials to be making such large obligations on behalf of the American public.
ALAN BLINDER: I think the speaker has a point. And I think, frankly, the Fed is very uncomfortable with the role that's been thrust upon it, because it does have the independence and the ability to act.
Now, Mr. Wallison's exactly right. The Treasury and the Fed are not breaking the law. There is legal authority for doing this.
And they're also in a different position. The secretary of the Treasury is the agent of the president who was elected. The Federal Reserve's an independent agency, so there's not a perfect parallelism.
As a democrat with a small "d" -- this has nothing to do with party affiliation, but with belief in democracy -- I think, when it comes to appropriating potentially large sums of public money to some public purpose, it ought to be coming from Congress, which is not to say the Fed has violated the law this time. It has not.
But it would be much better, and especially if we start talking very large magnitudes, to see explicit congressional appropriations.
RAY SUAREZ: But if you're standing there and there's a fire, and you've got a bucket of water in your hand -- I mean, could Congress have responded quickly enough to a crisis like this?
ALAN BLINDER: No, no way. And that's exactly why the Fed had to step in. I mean, when it came to the $85 billion loan to AIG and what amounts -- it's really a nationalization of AIG -- the Fed did it under unusual and exigent circumstances, Mr. Wallison said.
For other, bigger institutional fixes where there's more time to think about it, we ought to be going to Congress.
Challenges of a private sector fix
RAY SUAREZ: Is this a time when the markets might make the arguments that they can fix this themselves? Are appointed and elected officials even the people who should be taking the lead on this?
PETER WALLISON: Well, as a matter of fact, if you look at the AIG situation, if there'd been more time, the markets might well have fixed that situation.
It was -- AIG came upon their cash problem over the weekend, and no one else was really aware of the problem until late in the weekend, as far as I can tell. And at that point, it was very difficult to assemble a private-sector cash bailout for them.
They had approached a couple of mortgage -- investment banking firms and asked for some assistance. And they were told, "Well, we'd like to try, but you're not giving us enough time."
So the only recourse they had at that point was to go to the Federal Reserve. And they got a very tough deal. This is an extraordinary tough deal. Not only did they give up complete control of what is a solvent company, but they're paying well over 10 percent interest for the loan, which is fully collateralized by all of the assets of AIG, which is a very solvent and very well-capitalized company.
They hold a number of insurance subsidiaries, which are all functioning perfectly well -- no one who is ensured by an AIG company should worry about it. It was the parent company that ran into liquidity problems.
So they've paid a dear, dear price for this bailout that they have gotten. And I think, frankly, when the government exercises its warrants and takes over 80 percent of AIG, the government's going to make a good profit for the stockholders and for the taxpayers.
RAY SUAREZ: Peter Wallison, Alan Blinder, thank you both.
ALAN BLINDER: Thank you.