Terrence McNally interviews Dean Baker 10/07/08
Dean Baker, co-director of the Center for Economic and Policy Research (cepr.net), is the author of THE CONSERVATIVE NANNY STATE: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog on The American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.
TM: Where do we stand today? The response to the bail out bill has not been good.
DB: First off, the stock markets are not the way to evaluate the economy. Markets go all over the place. They tell you what people who were trading on Wall Street think about the world, which isn't necessarily indicative of anything. These were people who were willing to pay billions of dollars for pets.com back in 2000. That doesn't speak to success or failure of the policy.
Last Monday when the bill was originally voted down by the House, President Bush seized on the 1000 point drop in the Dow to say "Look. We just lost a trillion dollars. See how bad things are. Look how dumb these people are." Then there was this incredible drumbeat in the media that these know-nothings in Congress just cost us a trillion dollars of wealth.
Now let's imagine that Thursday Congress had voted it down a second time, and the markets did exactly what they've since done. We would have heard near hysteria.
This just shows the incredible double-standard dishonesty in the media and the reporting on this. When the administration and the Wall Street people get a policy through and the markets react poorly - as they obviously have - no one talks about it. That would be rude, right? But when they don't get the policy - "Oh the know-nothings have taken over...'
TM: Or, given the fact that the Wall Streets of the world have not responded positively, they would say, "Yeah, but it would be even worse if we hadn't passed the bill."
DB: No doubt they would.
TM: I think the markets were held to be a barometer of the psychology of people, which is so crucial to turning things around.
What are the real issues?
DB: There are legitimate issues that need to be addressed by a bailout or rescue package. This package was at least designed to address the fact that our credit system is freezing up. The banks are so distrustful of each other. They all know that they have huge amounts of bad debt, so they're reluctant to lend to each other, even for short periods of time.
TM: This constant inter-bank trading back and forth is what keeps it going. And when that freezes, everyone's in trouble...?
DB: Everyone could be in trouble. It doesn't immediately lead to that, but it can.
That continues to be a problem. The spread between the treasury bill rates - what you pay on a 90 day treasury bill vs. what you pay on a 90 day inter-bank loan - is actually higher today than it was before the bill passed. It's currently about 3 1/2 %. It had actually been as high as about 3.8% so it's a little lower now. But it's about 3.2% back before the bill passed.
TM: What does that mean?
DB: These are 90 day loans. Think of the Treasury Bill as being totally safe in the sense that people are pretty confident the U.S. is still going to be here in 90 days and paying its debt. So the question is: How much additional interest do banks insist on to lend to each other for 90 days?
TM: How much of a risk do they rate their fellow bank vs. a U.S. Treasury Bond?
DB: Right, and usually that spread would be 20, 30, 40 basis points -- or two, three, four tenths of a percent. Now it's three and a half percent. So it's a very big difference. That suggests those markets are still real tight.
The Fed started today lending money directly to non-financial corporations. This is at the end of the day what we care about. United Airlines or Verizon regularly finance their ongoing operations by borrowing what's called a commercial paper bond. It's most frequently 90 days. That market has been shutting down. Corporations have been having a hard time because the banks are usually the immediate buyers. Turns out the Fed has the legal authority to directly enter the commercial paper market and buy Verizon's commercial paper or Boeing's.
The concern was raised last week -- "Oh my God, Boeing's going to have to lay workers off 'cause they can't sell their money in the commercial paper market..."
I thought that was always exaggerated, but it's actually a complete fallacy. I feel stupid 'cause I didn't know they could do this, but it turns out the Fed can step in any time and buy Boeing's commercial paper.
TM: Paulsen's bailout is to buy bad debt, but you're saying that the Fed could loan money directly to someone who produces a good, rather than someone who merely has made a bad loan?
DB: Exactly.
TM: Now - after the bailout passes - they're doing that. It could have been the thrust of the initial rescue instead.
DB: And the story that President Bush and much of the media gave us, was, "Oh my God, we have no alternatives. The Washington Post actually had a front-page article on Saturday that said Henry Paulsen told President Bush "there is no Plan B. If we don't do this, everything goes down." Ben Bernanke, the Chair of the Federal Reserve Board, basically said the same thing. Well it turns out there was a Plan B, they could just lend the money directly to Boeing and the other non-financial corporations that need money. This is not ideal. It's not how I think the economy should be run, but we're in crisis mode and the question is what's the best thing to do to keep things going.
TM: If I loan money to Boeing and I assume Boeing's going to survive, then the operative word there is "loan." The government will get paid back. If I buy bad debts at overpriced rates so that I can provide psychological confidence to casino players, the chances of my getting anything back are almost nothing.
DB: It's not that we won't get anything back, but we are deliberately overpaying. For assets that are worth maybe 30 cents on the dollar, we're going to pay 40 or 50 cents on the dollar. At the end of the day we'll end up reselling them for something like 30, 35 cents on the dollar. So we're going to lose much of that 700 billion. I don't think there's any two ways about it.
TM: I've heard of other options, things having to do with going directly to the housing loans or directly to the likely-to-foreclose homeowners and so on. What's the state of some of those other Plan B, C, D?
DB: There's no momentum in anything else at this point. But at this point I don't think too many people think that this is the end of the story, so there might be some efforts to revive some alternatives.
Best case scenario: we get through this immediate crisis, and we're going to probably still have banks in very bad shape -- even after buying up 700 billion of their bad loans. So it's possible that some alternative proposals will again be put on the table. But at the moment I don't think anything else is being actively considered.
TM: So we've shot our wad? This was the big outlay and that's why there's no other alternatives?
DB: It's more a political than a financial issue. It's not that we don't have the money. The point is that there's a lot of political momentum behind this. How do you get the people who just voted for this as the rescue for the economy to then turn around and say, "Oh well, maybe that wasn't the rescue." A lot of people have to basically eat some humble pie, and these are not people who really like to do that. Plus they have the media totally on their side.
The national media basically became the PR firm for Wall Street over this period. I've never seen such really awful reporting on economic issues. Serious people running around talking about the Great Depression.
TM: You say you hadn't seen this sort of unquestioned media support for "economic" policies before?
DB: I was being careful.
TM: It's déjà vu of the Iraq War.
DB: A lot of it had that same flavor. I don't deny there was a crisis, just like I wouldn't say Saddam was a good guy. But that wasn't really the issue, it was do we have alternatives to do the job?
TM: It seems like one could use the same sort of sets of questions as should have been asked about Iraq: Are there alternatives? Are we asking root cause questions? Are we getting to the deeper need here? Or are we going to a last resort too soon?
DB: Exactly.
TM: Do you have expectations of what we might see from a McCain or an Obama administration? Or is the crisis moving too quickly to have a handle on that?
DB: Even if he won't stand up there and say it, I think McCain has made it pretty clear -- at least by virtue of his associations and his rhetoric until recently -- that he would do more of the same. At least if he can get away with it. So again, he might wish he hadn't said many of the things he's said over the last however many years, but he supported the policies that got us here. So it's very hard to imagine that he'd be a major reformer of Wall Street.
On the other hand, Senator Obama is a mixed story. He clearly is answering to a lot of people who want to see serious reform, He's got a lot of support from labor and community groups, and from other progressives in the country. At the same time, he's got a lot of Wall Street people among his very top advisers. So I think if Senator Obama gets in the White House, there'll probably be a real battle over the course of his economic policy.