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Jittery Markets, Weak Data Cap Grim Week on Wall Street

November 21, 2008 at 6:10 PM EST
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After a week of stock market dives and gloomy economic data, U.S. markets rebounded Friday, apparently on news reports that President-elect Barack Obama may choose Timothy Geithner as Treasury chief.
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JUDY WOODRUFF: Jeffrey Brown kicks off our economic coverage tonight with a look at where things stand.

JEFFREY BROWN: It’s been a grim week, to say the least: a slew of weak economic data; credit markets frozen, again; and stock indexes at a decade-long low, until a late rebound today, apparently on reports that New York Fed President Timothy Geithner is President-elect Obama’s treasury secretary pick.

Joining us to discuss all of it are Susan Phillips, dean of the George Washington University School of Business and former member of the Federal Reserve Board of Governors; Nouriel Roubini, professor of economics at New York University’s Stern School of Business and chairman of Roubini Global Economics; and Mohamed el-Erian, co-CEO of PIMCO, the world’s largest bond investor.

Well, Nouriel Roubini, starting with that last point about the late rally, would you ascribe it to the reports on Mr. Geithner? I understand you used to work with him.

NOURIEL ROUBINI, New York University: Yes, it’s clear that the rally was due to the appointment of Tim Geithner, prospective to become the next secretary of the treasury.

And it’s an excellent choice. It’s a man with great experience in domestic, international financial affairs and is an excellent choice for the position of treasury secretary.

Filling a leadership vacuum

Mohamed El-Erian
Co-CEO, PIMCO
The economy is at a critical moment. It's like a patient that has suffered a heart attack. It needs attention, and it needs very careful attention.

JEFFREY BROWN: Mr. el-Erian, what do you think? Do you also think that's what brought the market up at the end of the day?

MOHAMED EL-ERIAN, co-CEO, PIMCO: Yes, I agree with Nouriel. The market has shown first and foremost what a great choice Geithner is for the role at an important time for the economy. It also is relieved that uncertainty was being lifted.

And that uncertainty was being lifted in a way that suggests that he will get collaboration at Treasury, because Geithner has been working with Secretary Paulson for a while.

So it is attributed to Geithner in more than one way and speaks to the respect that the market has for Tim Geithner.

JEFFREY BROWN: You mentioned that uncertainty. We've heard a lot of talk in recent days about a potential leadership vacuum, people waiting to see what would happen. That's what you mean was addressed today or reportedly was addressed, at least.

MOHAMED EL-ERIAN: Absolutely. The economy is at a critical moment. It's like a patient that has suffered a heart attack. It needs attention, and it needs very careful attention.

So the notion that you would get a vacuum in Washington was very disturbing to the markets.

Today, with the possibility -- it's yet to be confirmed -- that Tim Geithner will be the next treasury secretary, part of that uncertainty lifted.

So we now know who is going to be or who's likely to be in Treasury. And that is a really important part of the puzzle. It's not the whole solution, but it's an important part of the puzzle.

JEFFREY BROWN: Susan Phillips, weigh in here on the question of a vacuum of leadership and reports and moving markets.

SUSAN PHILLIPS, George Washington University: Well, it's clear the markets have been very fragile; there's no doubt about that. And I think people are relieved to see that there will be some continuity in the plans that have already been started between Treasury and the Fed.

Obviously, Tim Geithner has strong relationships with the Fed and Chairman Bernanke.

JEFFREY BROWN: Have you been worried about all of this happening amidst this kind of interregnum? Some people see it as a vacuum; some people just sort of see it as waiting or inaction.

SUSAN PHILLIPS: Well, you know, maybe to me vacuum is a bit of a strong word. You know, and you have to recognize that the Fed, also, you don't have those folks disappearing on Jan. 20.

So there is a natural continuity that is provided by the -- the longer terms of the Federal Reserve governors. And, of course, Tim Geithner, being at the New York Fed, wouldn't have been going -- wouldn't have been going anywhere.

So there was some continuity. But I think that this really cements it and makes it very clear that some of the same players will be trying to deal with these very difficult issues.

A global recession

Nouriel Roubini
New York University
It's a very difficult moment both for the economy and for the financial markets. We are in the middle of a most severe recession, probably the most severe the U.S. will experience in decades.

JEFFREY BROWN: Now, Mr. Roubini, I want to talk about where things are right now as we sit here Friday afternoon. You've been on the program before, very pessimistic in the past. Where do you think things are now?

NOURIEL ROUBINI: Well, it's a very difficult moment both for the economy and for the financial markets. We are in the middle of a most severe recession, probably the most severe the U.S. will experience in decades.

At this point, it's becoming a global recession, a recession in the Eurozone, U.K., Canada, Japan, massive slowdown in growth also in emerging markets. The IMF is predicting a global recession for next year. And now we have this severe turmoil in financial markets.

Today the market rallied, but it's been a disastrous two months for the equity markets. The credit spread widened. The credit crunch has become worse.

So both economic and financial conditions are becoming worse. That's why we need new, strong leadership in the Treasury Department and in all the other economic positions in the new administration.

JEFFREY BROWN: Why did the credit market -- staying with you -- why did the credit markets seem to worsen this week? It had seemed like there was a period where things were loosening up a bit, and then we hear this week it's frozen again. What happened?

NOURIEL ROUBINI: Well, we've had a slew of really awful news about the economy, consumption, investment, employment, housing, you name it, the many financial and non-financial institutions that are in severe trouble, the many leveraged players like hedge funds and others that have to sell, an illiquid, distressed markets, and earning news have been negative, and then also bad news coming from the rest of the world.

So bad market news, bad earnings news, bad financial news, stock market is down, credit spreads are widening again. It's a very severe U.S. and global economic recession and financial crisis.

JEFFREY BROWN: Mr. el-Erian, we talked a little bit on the program yesterday about the new specter of deflation. How worried are you about that? What would it mean? People have been talking about the comparison about Japan in the '80s. How do you see it?

MOHAMED EL-ERIAN: I think there's two elements to that, Jeffrey. There's one, what's happening in the economy and what's happening in the financial system. And there is the realization today that this is a crisis of the system, not a crisis within the system, but a crisis of the system.

And that's why it's global in nature, indiscriminate in impact, and consequential in outcome.

Once you have a crisis of the system, there is a tendency for the economy to slow down very rapidly. And we've seen the numbers literally fall off a cliff when it comes to consumption, investment and trade.

It wouldn't surprise us here if GDP in the fourth quarter is a negative four to negative five percent, which is very consequential.

The minute you have an economy slow down this much, then deflation is a risk, and the markets have been responding to that.

However -- and this is really important -- however, if the policymakers react, then they can try and clip that tail. It doesn't mean they can stop GDP from contracting four percent to five percent. That is already on the cards. But they can stop this massive deflation.

But it requires, as Nouriel just said, leadership and policies coordinated around the world, because this is now a global crisis.

Weighing the Treasury plan

Susan Phillips
George Washington University
It's time to start getting some new policies out on the table for discussion. And I think it's a very positive sign that we're starting to see the economic team being appointed.

JEFFREY BROWN: Well, so, Susan Phillips, at least at the end of that was raised some positive idea that something, perhaps, can be done by government. What do you want to see happen next?

It's been a strange week, almost of inaction, nothing done on the stimulus package and nothing done on the bailout with the carmakers. What would you like to see happen?

SUSAN PHILLIPS: Well, you know, I do think that it's time to start getting some new policies out on the table for discussion. And I think it's a very positive sign that we're starting to see the economic team being appointed.

And, you know, Congress is going to -- Congress is going to wait until people -- until the new administration starts putting forward new policies for discussion.

So I think that the nature of the stimulus package, you know, I think there's a will to do something there. But exactly what the -- what the shape of it's going to be, that's what we need to start hearing, more definite proposals.

JEFFREY BROWN: Is it your sense that the Treasury plan, the rescue package might still work, hasn't worked? How do you see that?

SUSAN PHILLIPS: You mean the TARP, the TARP program?

JEFFREY BROWN: The TARP, yes.

SUSAN PHILLIPS: Well, the focus so far of the TARP program has been to really keep the banking system afloat. And I think that is exactly the right thing at this point.

I never thought it was a good idea to be taking sort of damaged or toxic assets directly from the banks.

I think the best thing to do is to make sure that the healthy banks are well capitalized so they can continue to provide financial services to the rest of the economy and -- because, if you let the banking system go under in a financial crisis, then you have to rebuild it first before the rest of the economy can start healing.

So I think that that's been a positive. And, you know, but there is still some money in reserve. So, you know, we're still in the middle of this, and I don't think we know the bottom line yet.

And there are still going to be some more actions that are going to be taken. And I'm glad to see the new team coming together.

A 'big list' of necessary actions

Mohamed El-Erian
Co-CEO, PIMCO
This is a multiyear program that requires sustained attention. And there isn't much room for slippage; otherwise, it's going to be the same issue, but a much bigger bill, down the road.

JEFFREY BROWN: Well, Mr. Roubini, where do you look to for any potential healing of the system at this point? What should be done? What can be done?

NOURIEL ROUBINI: Many more things need to be done. First of all, the recapitalization of the financial system has to accelerate; $250 billion is not enough. Most of the TARP is going to be spent to recapitalize banks, broker-dealers, insurance companies, finance companies.

Secondly, we need a major new stimulus package, because the economy is falling off the cliff, as Mohamed said. Consumption and investment are falling. Unless there is public demand, government spending on infrastructure, money to state and local governments, unemployment benefits, food stamps, things are going to boost the demand in a situation which private demand is falling.

Third, we have to reduce the debt burden of houses that are insolvent buried under a mountain of credit cards, auto loans, mortgage debt. We'll have to reduce the face value of the debt to avoid -- a tsunami of foreclosures would be disastrous for the housing market.

And, finally, the Fed is going to push the Fed funds rate down to 0 percent. It's effectively already down to zero percent. The target is one percent, but the effect is close to zero percent.

They'll have to do much more, radical new actions that have to be taken to re-liquefy the financial system to reduce the spread between market rates and government rates. This is very important, so nontraditional monetary policy, not just the use of the Fed funds rate.

All these things have to be done in a coherent, consistent way, showing leadership, vision and clarity. If that's done, probably markets at some point are going to stabilize.

JEFFREY BROWN: And, Mr. el-Erian, in our last minute, can all of that be done at a time like this when we are between -- does it worry you that we are between administrations here, even with the reports of a new treasury secretary possibly coming on Monday?

MOHAMED EL-ERIAN: It would worry me under any political outlook. This is a big list. And I agree with Nouriel's list, but it's a big list that pushes implementation capabilities to the edge.

But we don't have a choice. It's either do it now or do it later. And the only thing I would add to Nouriel's list is that it requires international coordination. You need to see action in the U.K. You need to see action in Euroland, in Asia.

And let's not forget that one consequence of all this is that we are redefining lots of things out there. We're redefining the balance between public sector and private sector. We're redefining the institutional landscape.

So this is a multiyear program that requires sustained attention. And there isn't much room for slippage; otherwise, it's going to be the same issue, but a much bigger bill, down the road.

JEFFREY BROWN: All right, we will leave it there tonight. Mohamed el-Erian, Nouriel Roubini and Susan Phillips, thank you all very much.