The demise of Lehman Brothers, Merrill Lynch's $50 billion buyout and concerns about AIG caused a Wall Street panic Monday. Economic analysts give insight on the causes and implications of the financial crisis.
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More now about the root causes and potential implications of the day's events, and to Margaret Warner.
And to help us understand that, I'm joined by Diane Swonk, chief economist at Mesirow Financial, a Chicago-based financial services firm; Nouriel Roubini, chairman of the consulting firm RGE Monitor, he's also professor of economics at New York University's Stern School of Business; and Kenneth Rogoff, professor of economics at Harvard University, he was chief economist at the International Monetary Fund from 2001 until 2003.
Welcome to all of you.
Diane Swonk, let me begin with you. Did the federal government, did the Treasury do the right thing this weekend, make the right decision not to prop up Lehman Brothers?
DIANE SWONK, Chief Economist, Mesirow Financial:
I think that was the right decision, but I think there's a one-two punch here. I mean, they did expand collateral. The Fed expanded the collateral they'll accept. That it putting their actual balance sheet at risk.
Now that they've done that, if they really want that capital to be used to utilize those funds on Wall Street, they're going to need to lower the Fed funds rate tomorrow and lower the discount rate tomorrow.
And I'm not positive they're going to do that. I am hopeful that we do see a 50-basis point cut in the Fed funds rate tomorrow that will not only help to bring down the base level of interest rates for consumers, because those spreads are very high on mortgages out there now, but will more directly help to provide capital and make it very cheap for the existing financial firms on Wall Street.