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| Originally Aired: September 19, 2007 |
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Financial Markets Made Easy |
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| Reacting to a tough housing market, job losses and weak retail sales in August, the Federal Reserve cut its benchmark interest rate by a half point on Tuesday. NewsHour Economics and Business correspondent Paul Solman answered your questions on what impact this decision will have on your money. |
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MR. SUAREZ: Welcome to Insider Forum from the Online NewsHour. Our guest today is Paul Solman, economics correspondent for the NewsHour with Jim Lehrer. We'll be putting questions to Paul submitted by the NewsHour's far-flung audience for this half hour. Paul, welcome to Insider Forum. MR. SOLMAN: Nice to be here, Ray, although I'd rather be asking you the questions, I suppose. MR. SUAREZ: Well, this week the Fed's Open Market Committee made big news by cutting interest rates, not just a quarter of a point, it had -- as had been expected, but a full half point, and it sent the markets skyrocketing and had people making all kinds of optimistic noises. Were you surprised by the half-point cut? MR. SOLMAN: Yeah. I mean, surprised, in the sense that, you know, I always, sort of, look at the consensus, and the consensus was more nearly quarter point than half point. But let's, even at the beginning here, remember they cut two different interest rates, which have different effects, presumably; and they cut them, presumably, for different reasons. So, it's not just that they cut interest rates, they cut two sets of interest rates. And I was -- and I think you were -- talking about the one they meet about every 6 weeks, which is the Federal funds rate. That's the one you were asking me, Is there a surprise -- was there a surprise? And that's the one I'm answering with respect to the consensus. The other one, the discount rate at their discount window, that -- I don't know what the consensus guess was on that one, actually, but I think that was a little bit of a surprise, as well. MR. SUAREZ: Well, one of the oft-heard phrases, during these past couple of weeks with the tumult in the markets, was that the central bank was injecting liquidity into the markets, and -- MR. SOLMAN: Right. MR. SUAREZ: -- we got a lot of questions on why the Fed was doing this and what it actually means. When you put liquidity into the market, where does the Fed get this money? MR. SOLMAN: Uh-huh. MR. SUAREZ: Is it taxpayer money? Is it money that the Fed, sort of, summons out of thin air? MR. SOLMAN: The answer is the last one. That is, the Fed -- the Fed was created in 1913 so that what we would finally have, as we had had intermittently over the decades in the past, in the 19th century, so forth -- a national bank, a bank that -- so there was one place where currency got made and issued. As many people know, in the 19th century -- but different banks had their own currency. There were drug stores that had their own currency. Anybody could issue currency, as long as people believed it and trusted in it. But by -- you had enough panics, financial panics over the decades, over the century and a half that America was in existence, until 1913, roughly, that there was the -- the need was felt to have a national bank. That national bank -- its most mundane, more -- most obvious thing it does is, it's in charge of the currency. Our Federal Reserve notes, if you look at your money, it says "Federal Reserve Note" on it. That's so that the -- it creates the currency, the Federal Reserve does, but, of course, the currency is a small portion of the total moving wealth out there. It also has -- creates Federal reserves. And what it does -- what it did during the panic in the middle of August -- let's say you're a bank and I'm the Fed. I like it better this way, okay? You come to me, and you say, "Hey, I'm short. I can't sell the securities that I bought here. I have things that -- people I have to pay off, other institutions, and so forth. So, I need -- I need money now." So, the Fed lends you -- I, the Fed, lend you, Ray, the bank, the money, and that literally comes out of thin air. Yes, I have the right to make the money, I can print the money, or I can credit it to your account. You know, and most transactions are done by computer these days, and, you know, accounts. I mean, it's not -- I have to give you that, you know, billions of dollars in nickels or dimes or something. I just credit your account with that. That's creating money, and that's what the Fed did. |
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Paul Solman
NewsHour Economics Correspondent |
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 If I lend one person money for their mortgage, and they go under, well, then my risk is total. But if I've got a diversified portfolio of lots of different mortgages, it's not as likely that any one, or any group of them, is going to go under.
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Follow the money
MR. SUAREZ: So, just to be clear, the Fed isn't sitting there with a green eyeshade and sleeve garters on, and you walk in, hat in hand, and they go to a closet where they've been saving up money for just this purpose. They can print it. They can make every dollar that's in circulation, in effect, worth a little less.MR. SOLMAN: Well, let's get -- forget about, for a moment, what -- or hold off for a moment, what -- whether it makes every dollar worth less. That's a different issue. But, technically, they're not printing it, they're just -- poof -- you know, "Make me a" MR. SUAREZ: Calling it -- MR. SOLMAN: -- "Make me" -- MR. SUAREZ: -- into being. MR. SOLMAN: -- "a malted." Poof, you're a malted, you know, that old gag. It's -- you know, "Make me -- make me solvent." Poof, you're solvent. The Fed enters the -- the technicalities, we probably don't want to get into here, but basically a -- you, the bank, have to keep a certain amount of money with me as the -- on reserve -- me, the Fed -- and if I put more money in your account, you don't have to keep as much in my -- in reserve with me. MR. SUAREZ: Well, hearing you explain it, I don't know why it's called a confidence-raising measure. Let's move -- MR. SOLMAN: Why -- MR. SUAREZ: -- on. MR. SOLMAN: No. What do you mean? MR. SUAREZ: Well, it's meant to still the waters. MR. SOLMAN: Sure. MR. SUAREZ: But what does it -- well -- MR. SOLMAN: But -- no, I mean -- MR. SUAREZ: I want to get to -- MR. SOLMAN: -- the reason -- MR. SUAREZ: -- to viewer questions, instead of -- MR. SOLMAN: Well, no, no, but let's just -- MR. SUAREZ: -- instead of midrash on the -- on the Federal Reserve. MR. SOLMAN: No, but -- no, but it restores the -- it's a very important point -- I mean, that's why the Fed did what it did -- it's restoring the confidence, because you, the bank, are holding these securities you can't get rid of; you can't unload them, you can't sell them for anything like what you paid for them, and you're going to go bankrupt, otherwise. You won't be able to pay the other bank, then that bank won't be able to pay the third bank, and so forth. That's what a liquidity crisis is. Suddenly, it's seized up. The -- what we -- what was thought of as cash in the economy no longer is. And what the Fed is doing by providing liquidity is saying, "Hey, I'll give you money that's cash, Federal reserves." Nothing better than that. "I'll give you that. You'll then have -- I'll lend it to you, I'm not giving it to you, that's why -- but I'm going to make it cheaper for you to borrow it." That's what the drop in the discount rate was. "And I'm going to be really liberal about when you pay it back to me. You don't have to pay it back overnight, you can wait 30 days. I'm going to use -- let you use collateral you didn't -- weren't able to use in the past, maybe a little looser on my standards here. You will now have cash, the Federal reserves. You'll have enough with me so that you can take money you would otherwise have had to keep aside. You can now take that money, lend it out, pay it back, and the whole system is unjammed." And that's what happened. MR. SUAREZ: Rob McTier, from Richmond, Virginia, asks, "Was the bundling and selling of mortgages supposed to spread out the risk of making subprime loans? If so, why didn't it work?" MR. SOLMAN: Well, it spread out the risk for the banks, because they passed the mortgages right along to lenders. Okay? They bundled them. I guess what he means, from an investor's point of view, does it spread out the risk? And the answer is, sure, if I lend somebody -- one person money for their mortgage, and they go under, well, then my risk is total. But if I've got a diversified portfolio of lots of different mortgages, it's not as likely that any, you know, one, or any group of them, is going to go under. On the other hand, the problem here is, because those securities were issued to investors who weren't really looking into what was in the bundles -- right? -- in these diversified pools of mortgages, and you didn't -- you had a system where there was a lot of incentive to make questionable loans, and not as much incentive in the system to look into those loans closely, you had a lot of investors taking other investors' word for it that this was -- that you were safe and everything was okay. And that increased the risk. So, on the one hand, the diversification lowers the risk. On the other hand, if nobody's minding the store and you've got a sneaky new, slick technique -- investing technique that's being used, and nobody is -- people aren't monitoring it sufficiently, that increases the risk. |
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Paul Solman
NewsHour Economics Correspondent |
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| Long-term interest rates went up, because people will worry about inflation in the future. And the second thing you worry about is what you were just talking about, which is that you are encouraging more reckless behavior. |
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Bad financial behavior
MR. SUAREZ: George McDonald, from San Antonio, Texas, wants to know, "Aren't the massive injections of liquidity by both American and European central banks inflationary?"MR. SOLMAN: Yeah. MR. SUAREZ: "Why should we inflate, rather than let the markets sort it out?" MR. SOLMAN: Ah. Well, there are two questions there -- okay? -- and they're both very important questions, so remind me about the second part of it. The inflation -- sure, the Fed is always running the -- trying to run this middle course. People talk about the Fed -- one of the cliches -- famous cliches is "tilting against the wind," so -- which, if the economy is moving too fast, slow it down; if the economy is going too slow, speed it up. But, whenever you're speeding it up, if you're the Fed, the way you do that is by putting more money into the system, lowering interest rates, and that always, always, always raises the specter of the possibility of inflation; because, as you said earlier, Ray, the more money that's out there, given the same number of goods and services in the economy, the less the money is worth. Right? And so, the Fed -- and today, the people who are criticizing what the Fed did yesterday, are saying exactly that, the Nobel laureate economist Robert Lucas, has a -- an op-ed piece in the Wall Street Journal this morning, where he is cautioning against the Fed abandoning its traditional-of-the-last-few-decades policy of guarding against inflation. And -- as -- that was an editorial in the Wall Street Journal this morning, as well. MR. SUAREZ: Our guests on the NewsHour this week talked about the moral-hazard question -- MR. SOLMAN: Yeah, that -- MR. SUAREZ: -- whether, by doing something like this -- MR. SOLMAN: Right. MR. SUAREZ: -- you're, in effect, bailing out bad actors. MR. SOLMAN: Yes. And that's -- there's no question that that's the other side of the story, and that's the other risk. You're -- you are risking inflation, on the one -- as one risk; the other risk is, people made crummy immoral loans, fraud -- Alan Greenspan is talking, in his book, about the fraudulence of the lending of the last few years in – And so, if what you do is say, "Okay, those bad loans and those mortgage-backed security pools and so forth that banks had, and they couldn't get rid of, well, we, the Fed, are now going to bail you out" -- you, again, Ray Suarez, the bank, here, in this little example -- "we're going to bail you out by lending you money against some of those loans you made that may actually have not been good loans at all -- prudent -- may have even been fraudulent." Well, of course, I, as the Fed, am then, at least in theory, encouraging you to do this again, to do more of it, and, if this has been a global bubble -- right? -- to re-inflate the bubble -- to use the same word, "inflate," as in inflation, but for -- meaning, you know, something slightly different here; that is, to again create an over exuberant world economy, American economy, housing economy -- that would disastrously, if it -- if it inflates even more and more, potentially dissolves -- you know, bursts, to -- with bad consequences -- that's the negative side of the -- what they did yesterday, that's what the critics would worry about, that we're going to be -- we're going to have too much inflation, the dollar's going to be worth less. And you see that the dollar is worth less compared to other currencies. Gold went up in price yesterday. So, that part is clearly true. Long-term interest rates went up, because people will worry about inflation in the future. And the second thing you worry about is what you were just talking about, which is that you are encouraging more reckless behavior. |
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Paul Solman
NewsHour Economics Correspondent |
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| A quarter of a percentage point, a half a percentage point, may not sound like much, but there are some people for whom that's the difference between making their payments and not making their payments. |
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Doing what's safe for your money
MR. SUAREZ: Slidell, Louisiana, is next. Linda Hockersmith asks, "If the Fed cuts interest rates, how will this stimulate the economy? Will it reduce the interest charged on credit cards and home equity lines? I'm not financially literate, but I do try to keep up with the economy, and I don't understand how a quarter of a percentage point can make such a difference."MR. SOLMAN: Well, first place, it's a half a percentage point, so she was going on what she -- we thought was going to happen as -- that most people thought was going to happen, as what did happen. But, you know, let's take that last point first. Everything you do, as economists like to say, happens on the margin. That is, a quarter of a percentage point, a half a percentage point, may not sound like much, but there are some people for whom that's the difference between making their payments and not making their payments. So, cutting interest rates a half a percentage point, relatively speaking -- or half a percentage point, when they're only about 6 percent anyway -- right? -- so half a -- half of 6 is whatever that is, 8 -- that's a lot more than half a percentage point. Right? One-twelfth -- that's about 8 -- you know, 8 percent you're cutting -- you're cutting the rate there. That's a big deal for a lot of people. As to her first point, yes, it percolates down through the economy in all those kinds of ways she was talking about, in, you know, credit cards and so forth. The prime rate at which banks lend to people, the basis for car loans and all kinds of other consumer loans, went down in lockstep with the Federal funds rate yesterday. So, if you think about this crisis being a crisis of people on the verge of foreclosure, let's say, which is a key part of this whole story -- right? -- and let's say, Ray, you've got an adjustment rate mortgage, an ARM, and let's say that rate is pegged, as many rates -- many such mortgages are, to the short-term U.S. Government Treasury rate, you -- which is -- which is closely linked to the Federal funds rate -- you then are -- and you just can't -- you're looking at your wife and saying, "Oh, my God, we're not going to be able to make our payment next month, because they're going to go up. We have this adjustable rate mortgage." And now, suddenly -- you're just not going to be able to make it, and now it goes down by half a percentage point. That could be the difference between your keeping your house, or not. MR. SUAREZ: Pursuant to that, Gary Reager, from Spokane, Washington, asks, "If the Fed lowers rates, how long until it trickles down to the homeowner?" MR. SOLMAN: Well, it -- right away. I mean, you know, the example I just gave should answer that question. That is to say, if you -- if your -- it depends, of course, when your adjustable rate mortgage adjusts, you know, on -- but, as somebody said on the show -- on the NewsHour last night, you could be in the situation where you're going to actually have lower interest rates than you had, because let's say you took a -- you -- your rate adjusted up last year, and now you're coming up for readjustment; your rate would -- could actually go down. Right? I mean, that is, you could be paying less than you thought you were going to be paying on a long-term basis. Well, that would be true of anybody who has an adjustable rate mortgage. At any rate, the answer is: immediately for some people. It depends on what your adjustable rate mortgage adjusts to. That is the index that's used for the adjustments that are made. MR. SUAREZ: Well, on -- well, piggybacking on top of that, Alexander Marketti, from San Juan, Puerto Rico, wants to know, "How tied is the long-term 30-year market to the short-term Fed funds rate? I've always heard mortgage rates were more driven by the 10-and-plus years Treasury bond rates than short-term hiccups." MR. SOLMAN: Yeah, well, I -- you know, I don't actually know what the 30-year mortgage rates are pegged to, but the relevant point, I believe -- certainly, they're -- they're a market-driven force. I mean, that is what they wind up going for. But what is significant and interesting -- I alluded to this earlier -- is that the longer-term rates, yesterday, went up; that is, the interest rate on a 10-year and a 30-year bond -- U.S. Government bond -- they actually went up by, I think, about a half a percentage point or something like that. So, they went exactly the opposite direction. Why is that? Because people are going, "Well, wait a second," getting back to one of the earlier writers -- one of the earlier people who asked about it -- because -- interest rates are expected to go up in the future because of inflation. That is, the -- as the Fed -- as -- part of an interest rate is what you expect inflation to be. Right? You're lending somebody money, and you're saying, "Pay it back to me later." Well, if there's going to be inflation, then you'd better get more money back in the future -- right? -- to compensate for that inflation. So, if people expect inflation in the future to be higher, then they're going to demand higher interest rates to borrow -- to lend money for that long period of time. Is that -- is that a clear explanation? MR. SUAREZ: Right. There's an expectation of higher inflation built into the pipeline, so people who are going to lend the Federal Government money, in effect, want more assurance of a return. MR. SOLMAN: They want a higher return to compensate, as you say, for the expected inflation. And when the Fed did what it did yesterday, it built in an expectation of greater inflation, all else equal, long term. I knew I should be asking you these questions -- MR. SUAREZ: Well, you know, Paul, whenever this happens, we always train our attention on people who borrow money, and we put all the emphasis on people who borrow money, and -- MR. SOLMAN: Yeah. MR. SUAREZ: What's this going to do to the auto market? What's it going to do to the housing market? What's it going to do to the stock market? And we don't spend as much time talking about the people who actually save money. And Mary Warren wrote in, from California, to ask, "How will the prospective rate cut affect those of us who have our savings in CDs or Treasury bills? There's always concern for helping those who need credit, but little concern for retirees who need investment income." MR. SOLMAN: Well, I mean, it's the decision that Mary made there -- right? -- to save her money in the safest possible way; that is, by saving it short-term, putting it in short-term Treasury bills or in a certificate of deposit, a CD. That is -- those rates readjust whatever -- you know, for whatever length of time you've loaned the money to people or put it in the bank -- 6 months, 90 days, and so forth. That's the safest thing you can do with your money, pretty much, because if interest rates suddenly rise -- that is, there's suddenly a spurt of inflation, why, you get your money, you reinvest it at the new higher rate, and so forth. The other side of that is, if interest rates are going down, why, when your money comes back and you have to reinvest it every 90 days, every, you know, 6 months, whatever it is, why, then you've got a lower interest rate at which to reinvest. But that's just a -- that's not a function of being a saver, that's a function of how you're choosing to save. If, for example, Mary had put her money in, oh, I don't know -- it's a little hard to come up with a good example of it -- but if she saved her money in -- I don't know, the eura, in international bonds, for example, well, then she'd -- this would have -- this would be doing her a great service, and she would be doing very well. So, it's not that -- it's not, in this instance, or ever, that it's savers who are being penalized; it's that saving in -- investing the savings in a certain way has consequences, and whether -- if you're playing interest rates by thinking that they're going to go up, therefore you take a very short time horizon and lend your money out on a short-term basis, why, then you're vulnerable to rates being cut, and you -- not doing as well. MR. SUAREZ: Well, you're not advising 72-year-olds to start playing with junk-bonds futures, are you? MR. SOLMAN: I think you know the answer to that. No, I am -- I'm not suggesting anything. I'm just saying -- goodness knows, I don't want to be telling anybody what to do with their money, it's hard enough to figure out what to do with my own retirement account, and -- you know, and fraught with peril. I certainly understand why anybody who's -- I'm 63 now -- anybody anywhere near our age is concerned about these things, because, you know, you've presumably built up enough for retirement by saving, that the number is large enough so that if markets crash or go -- or soar, or whatever, they're -- it sounds like big amounts of money involved, and I can certainly understand where Mary's coming from with respect to, "Well, my goodness, I was depending on 5 percent a year," let's say, "and now I'm only going to get 4 percent." I'm not being censorious, certainly, I'm not suggesting what she should, in fact, do. I'm only saying it isn't just a penalty for savers; it's the way it -- for investors -- people have saved and then invested -- it's a penalty for the kind of investment choice you made. That's all. MR. SUAREZ: Well, pursuant to that -- MR. SOLMAN: In this -- in this case. In this case. |
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Paul Solman
NewsHour Economics Correspondent |
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| Housing was a big factor in the economy, and it may have been the dominant factor in the consumer spending boom. We'll never know -- right? -- because we'll never be able to run the experiment in reverse. |
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Quick moves by Fed
MR. SUAREZ: Yeah. College Station, Texas, Paul Myer asks, "What are the downsides of an interest rate cut? A further-weakened U.S. dollar, higher energy prices, inflation?" And, you know, oil is at $82 a barrel right now.MR. SOLMAN: Right. Well, dollars don't mean as much as they did. That's -- MR. SUAREZ: And peaked -- MR. SOLMAN: -- part of the reason. MR. SUAREZ: -- peaked, it should be said, in response -- in partial response to the Fed's rate cut. MR. SOLMAN: Well, sure, but it's all part of the same point that he's making in that -- in that astute e-mail, which is, the dollar -- once -- if you just think about it -- all else equal, the simplest thought experiment -- you had X number of dollars out there 2 days ago, and now you have, in the banks -- because of the Fed's loosening of its credit and so forth, you have X-plus dollars -- right? -- you have a lot more dollars out there. And everything else is the same. Then, as you said in the very beginning, Ray, the dollar would seem to be worth less. Well, if the dollar is worth less, then it takes more dollars to buy oil, gold, the Euro -- that is, the currency of some other countries -- and that's exactly what happened yesterday. Right? All those prices went up. The dollar dropped in -- you could think of it no differently than when you see the headline that says, "Dollar Drops to -- in Relation to Euro." Right? It's no different than the "dollar dropped in relation to oil," really. I mean, the -- it is different, but there is a similarity. "The dollar dropped in relation to gold," I think it's exactly the same thing as "the dollar dropped in relationship to the Euro." You know, the oil has more factors involved, is what I mean. But -- you know, refineries closing, Nigeria, revolt, all kinds of other factors. But with regard to gold and the currency, pretty much the same. And you saw the same thing happen yesterday. The dollar was worth less against those other assets. MR. SUAREZ: We're getting a lot of questions on the practical day-to-day impact of this rate cut in households. And Robert asks, from Topeka, Kansas, "Is the housing market the only area generating positive economic indicators? Or, maybe to rephrase this, is this latest action by the Fed intended to keep alive the last activity that our economic health is relying upon as we plunge further into national debt?" MR. SOLMAN: No, I wouldn't say that, would you, Ray? I mean, we're -- housing is not -- housing isn't what has -- isn't -- it isn't the only thing that's propelled the American economy. I mean -- MR. SUAREZ: No, but Robert's onto something, to the extent that housing has been portrayed, for years, as one of the real value creators that's allowed robust consumer spending, that confidence that increasing equity brings, and years of cheap money that we had, created -- combined to create consumer spending, even when people's incomes weren't going up. MR. SOLMAN: Yeah, housing was a big factor in the economy, and it may have been the dominant factor in the consumer spending boom. We'll never know -- right? -- because we'll never be able to run the experiment in reverse and try -- and see what it would have been like if things had been different and we had -- you know, the booming sector everybody was talking about was biotechnology or something. But the point is that housing is still a modest fraction of -- I can't give you the number offhand -- of the total American economy. And so, it may be -- I'm repeating myself here -- that housing was a huge stimulant, and, on the margin, as I said earlier -- that is, all else equal -- the huge drop we're experiencing in housing now -- really, for the first time in your or my lifetime -- is going to be extremely bad for the economy. That's why -- right? -- the Fed has moved as dramatically as it has, because it's worried, not just about stabilizing markets, it's worried about the prospect of a recession. And it would be -- in this sense, that e-mail is completely correct -- it would be a housing-driven recession. I don't think any -- a housing downturn-driven recession -- I don't think anybody would quarrel with that. You -- and the reason is obvious. The e-mailer has a house. The e-mailer has taken out a home equity loan at -- against that house as its price has increased in value. The e-mailer has to pay back the home equity loan. The e-mailer needs to move, and the house is now worth 10 percent, 20 percent less than it was, and he or she can't pay off -- MR. SUAREZ: Well, to come full -- circle, I think I want to revisit whether the taxpayer is on the hook at all, because -- MR. SOLMAN: Yeah. MR. SUAREZ: -- Wendell Milliken, from Falmouth, Maine, gives us this piece of analysis. He says, "Housing prices skyrocketed to double in 3 years, and everyone thought they were rich and went out and spent the money. Now" -- MR. SOLMAN: Right. MR. SUAREZ: -- "the market corrects 30 percent, and everyone discovers that it wasn't real." MR. SOLMAN: Right. MR. SUAREZ: "Why should the taxpayers bail out the major lending institutions due to poor lending practices and homeowners that purchased way more than they could afford?" MR. SOLMAN: Because we're all in it together. That's the Fed's response. I'm not being normative here; that is, I'm not making a judgment as to whether the Fed did the right thing or not, but the Fed's answer, and the traditional economist's answer to this, is because we're all in it together, and Wendell and you and me, Ray, and all of us are very negatively affected if the economy goes into recession. You and I and Wendell may lose our jobs, through no cause -- no fault of our own, because corporations don't have the extra money, in your and my case, Ray, to give money to public television, say, you know, and the NewsHour can't sustain itself. The -- you -- and if -- if markets begin to crash, as they were -- as they seemed to be doing in the middle of August, then that's bad for everybody, as well, including Wendell and you and me, because we have our retirement money, at least some of it, in the stock market, presumably, or however we're holding it. And if all markets begin to crash, well, then that's bad, and the psychology is such that people then sell even more, which drives down prices even further, and we're all worse off. So, it's -- why should the taxpayers do it? Because, in the long run, it is deemed to be better for us all, and we're all taxpayers. Whether that's a -- the right call, or whether it actually stimulates more reckless investment, which leads to an even greater fall later on, we'll -- only -- can we end on this, Ray? -- only time will tell. And, even then, you won't really know what the causes of it were. MR. SUAREZ: Well, you know, it's -- this is one of those times when the operation of markets and the operation of peoples' personal economies intersect with some of the biggest questions that people have been asking, about how to live, forever. I mean, whether it's Kant or Nietzsche or many others who've tried to distinguish between a lot of people doing something that may be inadvisable, and the effect that it may have on another person who's not even doing that thing, but is tied to the general wheel, I guess they called it in the 17th century. You know, if you were keeping your nose clean and not making risky investments -- if all the people around you go belly up, you're going to suffer anyway. MR. SOLMAN: Yeah, unless, of course, you bet against them. I mean, there are -- there are people who are doing brilliantly -- who were doing brilliantly when this -- when this crash began to happen, because they bet precisely on its happening. But, yes, the common wheel, as they call it -- that's where the word "commonwealth" is -- that's the same word, the "common wealth" -- I mean, it's what we all have together, and -- if aggregated -- and the issue is -- of course, just as -- just as you say, I wouldn't have dared bring in Kant and Nietzsche here, so I'm thrilled to hear them introduced, but the -- but I -- that may be wandering a bit far -- but the basic point, of course, is, yes, there are things that people did that we would, all of us, find just horribly objectionable with regard to snookering people into taking loans that they couldn't possibly afford, cheating them on -- with phony fees that the mortgage brokers took, and so forth and so on. And you would think, "Oh, my goodness, the worst thing in the world would be to encourage such slime to continue to do what they did in the past," and yet, if you don't help share the pain from the consequences -- share with your other -- with the taxpayers of America, the pain of the fraud, it is possible that you create a situation in which everyone, including we taxpayers, suffers the consequence. MR. SUAREZ: Well, if the Fed makes a loan to a bank to get it over the next 90 days or 120 days -- MR. SOLMAN: I think the most -- the most the Fed was lending -- yeah, I just want to be careful here -- the Fed's loans at the discount window -- generally overnight, they extended them to 30 days in the middle of August; they were trying to tide the banks over some -- for some indeterminate period, because, of course, the banks could go back, you know, pay off, and then reborrow, and now they've lowered the interest rates for the discount window again, so that the banks can borrow at an even lower rate than they could have last month. But you're right -- MR. SUAREZ: But -- so, we get through rough patch. MR. SOLMAN: Yes. MR. SUAREZ: How is the taxpayer implicated at all? Is there a downside, a risk, an anything? Are we -- do we, as individuals, have skin in that game, or is it between the Fed -- MR. SOLMAN: Well, our dollars -- MR. SUAREZ: -- and the bank? MR. SOLMAN: Well, our dollars are worth less. I mean, I thought that -- that's what I thought the e-mailer or writer -- whoever wrote in was talking about with respect to taxpayers. I thought "taxpayer" was a word for "all of us," you know. We're not -- we're not specifically paying more taxes. It's not that the deficit necessarily goes up as a result of this. They're -- that gets into a whole other side issue. But, as citizens -- let's not use "taxpayers," let's use "American citizens" -- we have skin in the game, because we're mainly holding dollar-denominated assets. Right? I mean, that is things that are -- well, you know what I mean -- MR. SUAREZ: Uh-huh. MR. SOLMAN: -- things that are held at dollar stocks, the U.S. bonds, and so forth, unless we have all our, you know, assets in international, in which case we might not have so much skin in the game in this particular case. But we, for the most part, hold dollars, and if the dollar is -- if there's going to be inflation in this country, that would be -- that would mean our -- what we are holding is worth less. Right? So, we would have skin in the game, in that sense. MR. SUAREZ: Well, Paul, thanks for joining us. MR. SOLMAN: Well, it was fun to -- fun to do it. Kant and Nietzsche, my goodness. MR. SUAREZ: And for people who've come and visited us online, wherever you are in the world, thanks for stopping by. Make an appointment to visit us again next week on Insider Forum. Good to talk to you, Paul. MR. SOLMAN: Nice talking to you, Ray.
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How Will Dubai's Shaky Economy Affect the World?
