JIM LEHRER: Now, we’re ready to deal with today’s big economic news, and we go to Jeffrey Brown once again for our financial crisis coverage.
JEFFREY BROWN: The coordinated European plan to spend up to $2 trillion to assist failing banks comes after several weeks of confusion among Europe’s governments as the crisis mounted.
British Prime Minister Gordon Brown first proposed this approach. His government will spend $86 billion to take equity stakes in British banks and guarantee transfers between institutions in hopes that banks will begin lending again and thaw frozen credit markets.
GORDON BROWN, Prime Minister of Britain: In extraordinary times, with financial markets ceasing to work, the government cannot just leave people on their own to be buffeted about. For savers, for small businesses, and for homeowners, we must, in an uncertain and unstable world, be the rock of stability upon which British people can depend.
JEFFREY BROWN: The British action reportedly inspired the Europe-wide moves. Though there is an agreed framework for the cash infusions, each of the 15 nations involved will act independently on a national level.
German Chancellor Angela Merkel announced her government’s action this morning, which could pump as much as $670 billion into Germany’s ailing banking sector.
ANGELA MERKEL, Chancellor, Germany (through translator): I know that we agreed to extensive, far-reaching, as well as drastic measures today. They have one goal: They shall help to create new trust, trust between the banks, trust in the economy, and the trust of the citizens, because trust is the currency that will be paid with.
JEFFREY BROWN: French President Nicolas Sarkozy pledged nearly $500 billion to his own country’s effort. Sarkozy, who holds the rotating presidency of the European Union, said that the combined initiatives would outpace American actions to quell the credit crisis.
NICOLAS SARKOZY, President of France (through translator): We will see tonight that really Europe, a united Europe, did better than the U.S. by the amounts they’ve pledged. And I also think the plan we are presenting is totally transparent. Through you, the French people will know exactly what we are doing and why we are doing it.
JEFFREY BROWN: For its part, the U.S. Treasury offered a framework this morning for the $700 billion rescue package passed by Congress 10 days ago. Neel Kashkari, the Treasury official in charge of the effort, laid out several available options.
NEEL KASHKARI, Assistant Secretary of the Treasury: This team is working hard to define the requirements for those financial institutions so they can participate in one of three possible scenarios: first, an auction purchase, an auction of troubled assets; second, an equity program or direct-purchase program; or, third, in rare cases, the case of an intervention to prevent the impending failure of a systemically significant institution.
JEFFREY BROWN: Amid criticism that the U.S. has not focused on injecting capital straight into the banking system, as is now the case in Europe, Kashkari said that idea is very much in play.
NEEL KASHKARI: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement the public capital.
JEFFREY BROWN: And after complaints that Treasury officials took too long to detail their plans, Kashkari said they were working quickly now and with many other players.
NEEL KASHKARI: Treasury is working with both domestic and international regulators to understand how best to design tools that will be most effective in dealing with the challenges that we face.
For example, regulators are helping us to identify the quickest and most efficient method to purchase equity in financial institutions so they can resume lending.
Injecting equity into the markets
JEFFREY BROWN: This afternoon, Treasury Secretary Paulson gathered heads of leading U.S. financial institutions to discuss the plan.
With all this underway and more to come, markets today at least seemed pleased, staging a major rally.
And for analysis of all this, we're joined now by: Joseph Stiglitz, professor of economics at Columbia University. He was chairman of President Clinton's Council of Economic Advisers and shared the Nobel Prize in Economics.
Martin Feldstein, professor of economics at Harvard University, he served as chair of Ronald Reagan's Council of Economic Advisers.
And Fred Bergsten, director of the Peterson Institute for International Economics, he's held international economic positions in both Republican and Democratic administrations.
Well, Joseph Stiglitz, after a horrible week last week, a hugely positive today, market up about 936 points. What do you think was the key thing to turn the markets today?
JOSEPH STIGLITZ, Columbia University: I think it was the concerted action in Europe and the fact that finally -- finally -- the Paulson, the Bush administration is beginning to consider the equity-injection approach that has been used in other countries around the world and that has been adopted in Europe.
The contrast between the slowness with which the Bush administration has approached the problem and the speed with which the U.K., for instance, has been able to produce a program and then already implement it is really stark.
And I think the fact that that kind of approach can be implemented quickly has been very reassuring.
JEFFREY BROWN: Martin Feldstein, we talked so much last week about the need to inject confidence into the markets, into the system. Is there reason for confidence today?
MARTIN FELDSTEIN, Harvard University: There's more reason for confidence. There's certainly reason for the individual saver, depositor to be confident, both about their bank deposits and also their money market mutual fund balances.
But I don't think that the program that we've heard is going to provide enough confidence to generate substantial interbank lending or lending from the banks to the wider economy.
JEFFREY BROWN: What are its shortcomings?
MARTIN FELDSTEIN: Well, simply injecting equity by itself isn't going -- there isn't going to be enough equity injected to make other financial institutions and other investors in the commercial market willing to provide lots of additional funds to the major banks that are holding impaired securities.
What the Europeans are doing that we're not doing is providing some kinds of credit guarantees on top of that.
But the fundamental thing in my mind about the situation in the United States that makes us very different from Europe is that our bad mortgage paper, our bad assets in these financial institutions, is being driven by the foreclosures and defaults in the residential real estate market.
For the Europeans, the problem is assets that their institutions bought from the United States. So there's nothing they can do to stop that part of the problem.
For us, we have to get at the fundamental cause of all this, which is the rapid decline in house prices, which is causing individuals to default on their mortgages, leading to foreclosures and a further downward spiral in house prices.
A call for an urgent recovery
JEFFREY BROWN: All right, let me ask Fred Bergsten. Where do you see us today, after all this activity over the weekend and today?
FRED BERGSTEN, Peterson Institute for International Economics: I think we're moving very rapidly toward a very effective policy response to the problem.
What we've now got is the major countries having committed over $3 trillion, on top of all the money the central banks have put together, in what amounts to a five-part internationally coordinated program: putting new capital into the banks; guaranteeing interbank lending, so that key financial channel will start up; guaranteeing deposits by bank depositors and money market funds; and providing monetary and fiscal stimulus to get the economic side of the equation going again.
This is a global crisis. It's got financial and economic dimensions. I think the major countries over the weekend here in Washington at the G-7 meeting, at the IMF meeting, put the framework together.
The Europeans have now filled in the blanks on their implementation. The U.S. is rapidly moving to do it, as well.
So, looking forward, I think the world is right to be increasing its confidence that a comprehensive and effective program is really taking shape very rapidly now.
JEFFREY BROWN: Joe Stiglitz, is the next step really back on the U.S.? I mean, we're hearing about meetings between Secretary Paulson and major financial institutions. There's supposed to be an announcement tomorrow about the latest step. They're clearly rethinking their plan, aren't they?
JOSEPH STIGLITZ: They are. But I want to echo what Marty said. The fundamental problem is the problem of foreclosures, the problem of mortgages.
What we are doing is analogous to a massive blood transfusion to a patient that is hemorrhaging very badly, and we're doing nothing or very little to address the fundamental problem.
And if we don't, the problem is going to get larger again. That is, there are going to be more foreclosures. The holes in bank's balance sheets are going to get larger. People aren't going to be repaying the loans.
And that is really the fundamental problem that Paulson missed several weeks ago when he began. He didn't understand or didn't seem to understand that the banks had made bad loans. People weren't repaying those loans. That created a hole in the balance sheet. Buying bad assets improves liquidity, but doesn't solve the problem of the gap in their balance sheet.
JEFFREY BROWN: But so you're suggesting that the kind of rally we saw today could be quite short-lived if we don't do more?
JOSEPH STIGLITZ: We clearly need to do more. And then the other thing that we need to do more is we need a stimulus. Actually, I wouldn't use the word stimulus at this point. I would call it recovery.
I would use point -- I would say, we have to prevent the economy from going down deeper. The fact is that states and localities are facing a crisis. If they don't get aid fairly soon and in massive amounts, they're going to have to cut back expenditures. You might call that a de-stimulus. We're going to have a contraction going on. So we need far more than what has been done.
Housing sector problems
JEFFREY BROWN: Well, Fred Bergsten, back to you. You thought that what we saw in the last couple of days was really quite a boost.
FRED BERGSTEN: I do think so. What I think Joe overstates in the sense that the U.S. plan does include the possibility of renegotiating mortgages. The Congress insisted on that when they appropriated the $700 billion for the Paulson plan. That's got to be an important dimension of it. But I think part of that's in the plan already.
The administration has already been instructing Fannie Mae and Freddie Mac, which they now own, to be doing a lot of that same kind of renegotiating. You could put more emphasis on it. You could put even more money into it.
But a lot of that is already in the program and is moving forward.
JEFFREY BROWN: Martin Feldstein, do you want to weigh in here?
MARTIN FELDSTEIN: Yes, I do, because while it's true that they're going to try to help some of those who are already with negative equity, that is, have loan, mortgage loans that exceed the value of their homes, nothing in this plan deals with those people who today have some positive equity, have loans less than the value of their home, but are seeing house prices fall and are being pushed into a situation where it will be attractive to default.
So there's no firewall. There's no circuit-breaker to stop what Joe Stiglitz described as hemorrhaging from the loss in the prices of homes, leading to defaults, leading to foreclosures, and thus creating a downward spiral in house prices.
JEFFREY BROWN: I suppose what people want to know -- I'll stay with you, Martin Feldstein -- you know, people see these big swings, huge swings in the market, and a freefall it looked like last week. So do steps like what we saw over the weekend and today, and the market going up, is that not -- are not those steps necessary to at least stop the freefall?
MARTIN FELDSTEIN: I think that they have certainly helped to build confidence. I think in Europe what we're seeing is essentially a nationalization of the banks, a nationalization of risk, so that's a very different situation than we've ever seen before and certainly different than anything we've seen in the United States.
And even if we were to do everything in the U.S. that the Europeans are doing, it wouldn't be enough, because we have this fundamental problem in the housing sector that's driving our own and, indeed, also, to the extent that the Europeans are holding U.S. mortgage-backed securities, that is driving the problems there, as well.
The role of governments
JEFFREY BROWN: Joseph Stiglitz, what about this notion of nationalization of the banks? If we do go down the road of injecting, investing directly in banks, how does that change, oh, you know, the system we've all lived under for forever? How does that change the banks? How does that change the role of governments? How does that change all of us as depositors?
JOSEPH STIGLITZ: Well, we've already changed the role of government. I don't think anybody ever thought in a Republican administration you'd have this kind of massive government intervention in the economy. But there was, in that sense, no choice.
Sweden actually showed the right framework, and, actually, Norway and other countries have done it. What they did is they effectively nationalized the banks, but then they privatized it. They restructured them.
And the result of that was that it was done relatively quickly. The economy recovered relatively quickly. The problem with the way we've been doing it, this partial, halfway house, is that you're giving money to the private sector, the guys who've had a proven record of bad risk management, of paying themselves big bonuses and leaving big holes to the shareholders, you're giving them more money, haven't changed the regulatory structure, saying, "Trust us."
There's a real conflict of interest. There's a kind of simplicity to the way that Sweden and Norway did it that, I think, has a certain attractiveness to it.
JEFFREY BROWN: OK. We only have 30 seconds, Fred Bergsten. Do you want to come back on that?
FRED BERGSTEN: Yes, I think the government, in taking a big position in the banks, in Europe and here, are going to be insisting on tough conditions.
They're certainly going to limit executive compensation. They're certainly going to require a cessation of dividend payments until the banks are earning money again. They're charging very high interest rates.
The British are charging 12 percent on the preferred stock they're buying. And they're going to require the banks -- at least in the British case -- to lend to small and medium enterprises, to lend to homeowners so they can deal with their foreclosure problems.
The governments are going to put conditions on this that won't let the lousy managers keep doing lousy management.
JEFFREY BROWN: All right. We will watch for the next shoe tomorrow. Fred Bergstein, Joseph Stiglitz, and Martin Feldstein, thank you all very much.