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Election 2008: Economy's Impact on Politics and Policy

Glenn Kessler
Washington Post Diplomacy Reporter
Tuesday, September 16, 2008 1:30 PM

Washington Post diplomacy reporter Glenn Kessler, who has written extensively on the economy and has helped cover the 2008 presidential campaigns, was online Tuesday, Sept. 16 at 1:30 p.m. ET to discuss the latest economic problems in the United States and their potential impacts on politics and policy before Election Day.

The transcript follows.

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Glenn Kessler: Okay, I'm here. Let's get the questions started.

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Fairfax, Va.: I am a stock holder and insurance customer of AIG. At this point, I have sadly come to grips with the loss of principal on the stock. However, I have two 20-year term life insurance policies. If AIG folds, are these just worthless as well? I got them prior to turning 40, and it will be substantially more to get a new policy now at 45. Am I just stuck? Thanks for any thoughts.

Glenn Kessler: Sorry to hear about your stock investment. But your insurance policies should be fine. AIG has massive assets that likely will ensure that insurance customers get paid. AIG's problem stems from another part of its business, known as credit default swaps, a kind of insurance contract tied to corporate defaults. If AIG collapses, I would assume the traditional insurance business -- and the assets that back it -- would be purchased by another insurance company.

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Reston, Va.: Hi Glenn. Given the short-term vision the voting public seems to have with respect to saving for retirement, do you think the current market turbulence will kill any discussions of private Social Security accounts, even if enrollment would be optional?

Glenn Kessler: Certainly the idea gained a lot of currency when the market was going up. But President Bush was abandoned by his own party when he tried to push it hard at the start of his second term. Eventually, lawmakers are going to have to deal with the long-term financing problems of Social Security. I imagine they will use traditional approaches, though I could imagine private accounts being introduced as an add-on, not a replacement for traditional Social security.

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Oviedo, Fla.: I'm a lifelong Democrat (writing in Hillary Clinton this year) and wonder how true to their promises about tax cuts the candidates can be. Is it really up to them to do this by fiat -- can't they get vetoed along the way? They each have promises that sound like "done deals," but they aren't. Right? Explain the process, please. I love your work -- you're brilliant.

Glenn Kessler: Thanks for the compliment. All of these plans and promises should be viewed only as a guide for the general inclination of the potential president. There is no done deal. First of all, circumstances change. (Neither candidate has updated their proposals to account for the huge new federal deficits announced this month.) Second, you need to get any tax bill passed in the House and then the Senate. If the Democrats gain even more seats in Congress, McCain would have real trouble cutting taxes across those board as he has promised. Even with those extra seats, Obama might have to accept tax cuts for people making above $250,000 in order to get past a Senate filibuster by Republicans. So take all of those promises with a huge grain of salt.

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Anonymous: I've seen Democrats blaming Bush for the banking collapse and Republicans blaming Clinton for the same. Obviously it's far more complicated than one president's fault, but just for fun, who of those two would you say is more to blame? (Or would you stick it on the current or former Democratic majority in Congress or the Republican majority that came between those two?)

Glenn Kessler: Presidents (and Congresses) often get blame or credit for things that they had little to do with. And Wall Street has been adept at inventing new products that blow up in their faces every few years, after everyone has gotten a bit too greedy. But the crisis happened on this president's watch, and it seems the administration was slow to respond it -- though Hank Paulson is certainly making up for lost time. Bush's first two Treasury secretaries had no Wall Street experience; Paulson, by contrast, was the former head of Goldman Sachs, possibly Wall Street's best-run firm.

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Northville, N.Y.: What a load of rubbish coming out of Washington. The GOP mantra since Reagan has been "get the government off our backs" and "get rid of excess regulation." Well, we sure did it. McCain's chief economic adviser, Phil Gramm, who could have been Secretary of the Treasury if McCain wins, was the king of banking deregulation, and McCain himself had a savings and loan scandal years ago that would have killed off the political career of a non-war hero. Sure, some of the Democrats were in on it as well, but who is kidding who? Like the Iraq War, this is a GOP show, based on their political and anti-government regulation economic philosophy. This is the chickens coming home to roost, and we need more New Deal regulation.

Glenn Kessler: I'm posting this comment to generate discussion. Thanks for the input!

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Silver Spring, Md.: Is there a regulatory device in place to keep AIG from selling some of the assets that back up its insurance business to buoy other parts of the business? Or perhaps I misunderstood your response to the first question of the chat. Thanks.

Glenn Kessler: I am no insurance expert, but I believe those assets are required to be there by the insurance regulators. There are strict regulations on moving those assets around. New York State this week indicated that it may allow AIG to move harder-to-sell assets to back insurance claims, allowing it to free up tradable assets for the parent company to borrow against as it seeks to come up with cash.

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Implications of Lehman's Bankruptcy: Given that they filed for Chapter 11, how much of the Lehman Brothers' assets now are either 100 percent worthless or paying out pennies on the dollar? What are the longer-term implications of so much wealth disappearing into thin air?

Glenn Kessler: The stock is worthless. In bankruptcy, ordinary shareholders get paid after bond holders and preferred stock holders, which means they almost always get nothing. However, you will be able to write off the loss against any gains you may have recorded during the tax year.

As for the implications, people feel poorer and are less likely to buy or invest.

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Washington: What do you think the political shelf-life of the situation with Lehman, Merrill Lynch and Wall Street will be?

Glenn Kessler: With just 50 or so days before the election, I think this will be one of the main themes of the final weeks. I make no guarantees about the political shelf life after the election!

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Sedona, Ariz.: Are the fundamentals of our economy still strong?

Glenn Kessler: Someone with a sense of humor! I bet McCain doesn't ever say this again...

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Long Beach, Calif.: Thanks for taking my question. I spent 17 years at major New York Stock Exchange member firms out here on the West Coast. My experience is that these messes (like the Savings and Loan crisis) take years of gestation time, the erosion of regulatory scrutiny by government through a combination of de-regulatory legislation, followed by loose regulating (intentional or not).

This leads to a feeding frenzy within the financial industry, with all participants smiling and winking at risk until the weight of problems tip the boat over. Would you say that describes the process this time around? What government regulators were looking the other way with a wink while the feeding frenzy was going on? Or was it just that the mortgage industry figured out that Fannie and Freddie weren't minding the store, and would buy any junk mortgages they bundled up and sent over?

Glenn Kessler: This is a very astute observation. In the 25 years since I first started writing about Wall Street, I have witnessed the insider trading crisis, the Savings & Loan crisis, the junk bond crisis, the program-trading crisis, the emerging-market crisis, the derivatives crisis, the leveraged-buyout crisis ... and now this. There is just too much money to be made too quickly, and people can get very greedy -- and regulators and lawmakers are among the last to figure out what is going on.

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Columbia, Md.: Northville, Glass-Steagall was repealed in 1999, supplanted by Gramm's act -- but a Democratic president signed it. So I think blame is equally laid.

Glenn Kessler: The repeal of Glass-Steagall has little to do with the current situation. Mortgage backed securities were created before the repeal, and the development of the subprime market was a natural outgrowth as investment firms became bolder and cut more corners.

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Southwest Nebraska: McCain and Palin have both been talking about how regulatory agencies need reform. What have they done to promote watch dog activities as a senator or governor?

Glenn Kessler: I am not sure about Palin. McCain is generally known as a deregulator, and has proudly called himself that in the past. He did vote for the Sarbanes-Oxley Act that imposed new accounting standards on corporations, however.

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Re: Implications: The main thrust of my question was more: How much worse is it going to get now that a bunch of paper backed by Lehman Brothers' assets is now just a bunch of paper? Are we talking a cascade of worse news, or did the market's 500-point drop yesterday purge a lot of it?

Glenn Kessler: We will have to see whether the fallout continues as Lehman's assets are unwound. But I would keep my eye now on whether AIG fails; Lehman is old news.

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Northern Virginia: I read about and liked Obama's speech on financial regulation back in March and was mad that, in the rush of primary politics (and without something like Rev. Wright's video clips to propel it), it got so much less coverage than the race speech. To what extent does his speech of a few months ago apply to this crisis? Or did it have a broader focus?

Glenn Kessler: That speech is certainly relevant, and my guess is people will now look back at it to see what he proposed and whether it still makes sense in the current context.

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Austin, Texas: A lot of people have said that this is the most serious problem on Wall Street since the '20s. Even Greenspan -- not an excitable sort -- said it was the sort of thing that happens once or twice a century. So why do you suppose the Dow currently is up 14 points or so and apparently holding pretty steady?

Glenn Kessler: I think today is a holding pattern -- in part to see what the Federal Reserve does at its meeting today. One day's trading never tells the story; you need to look over a period of many months.

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Mt. Laurel, N.J.: I was wondering if you could explain what is different between the Bear Stearns situation and the Lehman Brothers situation, per Henry Paulson's recent comments? Thank you for any light you can throw.

Glenn Kessler: Treasury helped fund the purchase of Bear Stearns because it felt that its failure would be too much of a shock to the financial system. Paulson is guessing that the failure of Lehman was anticipated by the market and thus is not such a shock. He wanted to draw the line somewhere, especially after the bailout of Fannie Mae and Freddie Mac. We will see if his bet pays off.

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Cedar Crest, N.M.: Regarding the "fundamentals," McCain backtracked and said the fundamentals are the working men and women, the small business owners and entrepreneurs. Is this a common use of the term "fundamentals of our economy"? When I think of "fundamentals", I think about the unemployment/inflation rates, the budget deficit, trade deficit, durable goods orders, etc. ... Who is right -- McCain or me?

Glenn Kessler: No, that's just spin. Politically, McCain's comment was quite damaging, and he's trying to recover.

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Austin, Texas: Paraphrasing: "Private accounts might be introduced as an add-on to, not replacement for, Social Security." Isn't that what IRAs are?

Glenn Kessler: Yes, but these would be funded with some government money. Even some Democrats who have been wary of privatizing Social Security have supported this concept. The problem is ... where to get the money!

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The repeal of Glass-Steagall has little to do with the current situation.: Why is this? I thought Glass-Steagall would have kept Bear Stearns, Lehman Brothers, etc., out of the mortgage business.

Glenn Kessler: No, they were already in the business of buying mortgages and packing them into securities--in fact, it was a Wall Street invention which commercial banks loved because it took the mortgages off their books.

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Glenn Kessler: Thanks for all of the questions. There are dozens I did not have time to answer, so I thank you for your enthusiasm. I have to get back to work!

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