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Friday, Sept. 19 at 10 a.m. ET

Planet Money's Take on the Week in Financial Turmoil

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Adam Davidson
Editorial Director for NPR's "Planet Money"
Friday, September 19, 2008; 10:00 AM

NPR business reporter Adam Davidison was online Friday, Sept. 19 at 10 a.m. ET to take your questions about the causes and potential repercussions of this week's market meltdown, and discusses the network's new financial blog and podcast, Planet Money.

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A transcript follows.

Davidson is a reporter about business and economics for NPR's national desk and the editorial director for Planet Money, a multimedia project covering the global economy.

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Washington, DC: I'm your average, run-of-the-mill investor, probably. My husband and I both have 401(k)s through work, and I have a small individual IRA and a Roth IRA, and we have a T.Rowe Price mutual fund, 529 plan for our son. How worried should we be? We are in our 30s -- do we panic?

Adam Davidson: Hi,

If you are in your mid 30s, I would not panic. I am in my late 30s and I am counting on my 401(k).

A wise person told me that bubbles--periods of excessive, irrational optimism--are always followed by periods of excessive, irrational pessimism.

Things are troubling now, no question. The fundamentals have been shaken to their very core.

But, from experience, we know that things look far grimmer than they actually are.

I feel confident that, like every time in the past, the US and the world will continue to grow. There will be smart people coming up with new products and new ways to make old things.

There will be great books and new businesses and all of the things that make an economy grow.

The financial system will adapt as will government regulation.

It won't be perfect. But it'll work. There will be growth. All of our 401(k)s will be worth more, in a decade or two, than they are now.

Frankly, us 30 year olds are in great position. We're buying up stocks on the cheap that we don't need to sell for a long, long time.

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Washington DC: Do you know when this new bailout agency should be ready and taking phone calls? I need to refer the debt collectors to them. Thanks.

Adam Davidson: That is funny.

And, yes, it's lousy that the average person doesn't get a bailout.

If this thing works (and my hunch is it will) we do all benefit from the avoidance of a systemic breakdown of the global economy.

But, yes, it seems to be a truly lousy fact that the people who benefit the most directly are, in some cases, the very people who caused the crisis.

My strong sense is that Paulson, Bernanke and others take no pleasure in that. It goes against their core belief in how a market should work.

I know, I know. You're all going to say: but Paulson is one of those people. And, yes, he is. And I don't know the guy. But the strong evidence, in my view, is that he has tried, hard, to make those who took unreasonable risks pay the full price.

But when the crisis became potentially cataclysmic, he stepped in.

I'm not here to defend Paulson, but I will note that his firm, Goldman Sachs, seems to have taken far fewer of the crazy risks than any other.

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Columbia, S.C.: The idea that investment houses "need" to be merged with traditional banks is a terrible idea. Of course investment houses want the balance sheet of banks, so the can get into the exact same leverage problem that they got into this time. And, if you think this current situation will cleanse investment houses of their appetite for over leveraging assets, you're not a student of history. If we these two groups to become (more) intertwined, the FDIC will be in a pretty pickle for all of the failure risk it will take on.

Adam Davidson: That's interesting.

I've been reading a lot about this very issue. It's a crucial one.

I am going to say that the economists I've been speaking with disagree with you.

During the Great Depression, there was a strong belief that the cause was that the investment house portion of banks were cheating their commercial bank customers.

That is why the Glass-Steagall act outlawed combined investment and commercial banks.

But Europe never outlawed combined banks (well, italy did for a while, but no one else). And their combined banks did not cause huge crises.

Many economic historians have looked at the pre-Great Depression era and find that banks did not actually do all the bad things that Messers Glass and Steagall said they did.

In fact, Senator Carter Glass, in 1935, asked for his Act to be repealed. He said it was an excessive over-reaction to the Depression.

Also, if investment banks get FDIC insurance, that will come with a lot more regulatory oversight.

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D.C.: I am a big fan of your stories! Very understandable to a economics novice like me.

Thank you!

Adam Davidson: Thanks. That's really nice to hear.

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Money Market Mutual Funds: What is it with this country? I did not put my money in money market mutual funds, because it was an investment vehicle that involved risk and I didn't want to take the risk. Those who did invest, clearly accepted the risk. Now that things aren't going well with the investment, we are now guaranteeing the funds. Sheesh. So not only do I not benefit from the funds during the good times, I'm suppose to pay for the funds in the bad times. I'm so tired of this. I was prudent in the "good times", but clearly I'm the fool, since I didn't realize that risk meant the government would prop up/guarantee the asset values.

Adam Davidson: You know, you did take a risk. You took the risk of not beating inflation by keeping your money safe from money markets.

There is no risk-free way of having money. It's just a matter of which risks do you want, how do you diversify them, etc.

You are, of course, entirely right, though, that the entire system breaks down if people get the benefit of taking risks but don't have to pay the cost. That's a horrible situation. It encourages reckless behavior. It's ridiculous. We shouldn't do it.

The only reason it might be acceptable, today, is that a complete lack of confidence in the money market system could quickly lead to the kinds of bank runs we saw in the 1930s.

People lining up outside of a brokerage to take all their money out.

That could mean the sudden absence of trillions of dollars of capital just when the economy needs that capital most of all.

You'd feel that pain. It could lead to a complete cessation of global economic activity. I mean, nobody doing nothing.

We will all be studying this carefully over the coming weeks and months and years. Thousands of PhDs will be written about the last few hours.

We will, one day, have a better sense of just how risky things were. Just how ugly the picture Bernanke and Paulson were looking at is.

We will be able to judge their actions well.

But not yet, I think. We just don't yet know if bailing people out was worthwile or not.

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Rhode Island: How do you feel about the soundness of firms like Schwab and Vanguard and their money market funds? Thanks.

Adam Davidson: I'd say, right now, those money markets have never been sounder. The US government seems set to guarantee them to some degree.

And even without that guarantee, I don't think it's yet time for panic. That would be bad.

It is worth noting--as above--that if you make any interest at all above the Fed rate, you are taking some risk. That is the only way you can get that higher return.

There are no risk-free investments.

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Harrisburg, Pa.: How much do these bailouts threaten our federal government's long-term financial security. The former Comptroller General is warning we may face financial ruin in 50 years and there are fears this action alone could lower our credit rating and cause inflation. How is this going to affect our Federal government's financial situation?

Adam Davidson: I do not think we need to worry about our fundamental soundness.

I'm not sure what the Comptroller said exactly.

Our debt is big. It's not as big--as a percentage of GDP--as Europe's. It's too big, though. Definitely.

I don't think we're anywhere near the size of debt where we have to worry about a total government meltdown or anything like that.

And any 50 year financial market predictions have about as much validity as any 50 year weather predictions. None.

As our debt gets bigger, there are more US treasury bonds out in the world--they are our debt. So, each additional bond we want to sell is a little less attractive to the world. That means the US government has to pay a higher interest.

Higher interests are associated with lower growth. So, at a quick approximation, I'd say more debt=deflation not inflation. More debt=less growth.

That's not good. That's bad.

But it's a question of degree. This new proposal seems to have the potential to add 10% on to our debt. Probably a lot less than that.

That's not great. It would be much better if it didn't have to happen.

But it's nowhere near a cataclysmic amount. We can handle this.

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Alexandria, Va.: I suspect some good growth after this correction is finished. However, if I reallocate my 401(k) to more aggressive funds in anticipation of this, will that negatively affect the "buying while cheap" benefit I am getting now (I am 37)?

Adam Davidson: I am not a financial advisor.

I will say this strikes me as a particularly lousy time to be reallocating funds in some agressive way and trying to time the market.

In the best of times, I think almost nobody can reliably predict market movements. But, my goodness, nobody has any idea what is going to happen on Monday, let alone over the next year.

What I'm doing is the standard model: sticking to some conservative allocations among low-cost index funds.

Honestly, I'm not even looking at my portfolio right now.

I do have my paycheck set to automatically contribute to my 401(k) and I am thrilled that I'm buying at a discount.

But switching things around, chasing earnings, that strikes me as a horrible idea.

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Washington, DC: Looking at the big picture, is this the end of the current era of free market ideology? This week has shown us socialism on a scale larger than any in history...

Adam Davidson: I hear this a lot this week. I don't buy it, to be honest.

The US has always had a mixed-economy. We are, simply, not a free market economy. The government plays a huge role in directing economic activity through the Fed and regulation and taxation and other ways.

Something like a third of the US economy flows through government coffers. And the rest is impacted by government decisions.

The government plays a bigger role in Europe. And, of course, played a much bigger role in the Soviet Union and Maoist China and Saddamist Iraq, etc.

My sense is the crisis of the last year is the result of a lousy mix of government regulation and market excess.

The Fed, Fannie Mae and Freddie Mac, US housing laws, the Central Bank of China, and many other government entitites played a huge and central role in getting us here.

As, of course, did reckless greed on Wall Street.

So, I don't see it as the end of free marketism. I see it as an adjustment in a managed economy to, we hope, a better managed economy in the future.

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Washington, D.C.: Will this turmoil present a constraint or an opportunity for the next President?

Adam Davidson: I would guess contraint is the key for the first few months and years.

There is going to be huge political pressure to do something. As there was in the 1930s. And, like the 1930s, every interest group will come to town demanding their favorite solution.

And, like the 1930s, some of the outcomes will be good and some will be lousy.

I'm not a political reporter and I find Washington a confusing place, to be honest.

But I wouldn't want the job.

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Prescott, Ariz.: Seriously. I didn't hear one punitive aspect to this bailout. I believe I speak for the American people when I say we at least need some guarantee that the people responsible for this won't be working on Wall Street anymore, and some old fashioned public humiliation is in order. These people basically stole, and as they were doing it, the American people didn't get a single raise in the last 8 years.

Adam Davidson: I agree that there needs to be a bite to this. We don't want people walking away with billions.

Your anger is totally understandable.

I'd say it's a bit broadly directed.

Wall Street is filled with a lot of different people doing a lot of different things.

The structured credit teams and risk assessment teams that can be most blamed for the crisis make up a tiny portion of Wall Street.

Also, there is a lot of pain. A lot.

Look, I would guess that every person who has been fired or lost their job in the last few days and months is a lot richer than I am. But most of them had nothing to do with this crisis. It wasn't caused by "Wall Street" it was caused by specific divisions within.

Also, I think as you research the matter, you'll find the "basically stole" idea isn't quite right. It's true for some of the more deceptive mortgage lenders and the like.

But I've met a lot of the people who were involved in the crisis. My feeling is they were naive, they were blind to the risks they were taking, the indulged in self-reinforcing group think, they were irresponsible. They were not thieves.

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Washington, DC: The presidential campaigns are going back and forth about whether the "fundamentals of our economy" are sound or not. But I have a more basic question: what ARE the fundamentals of our economy? Jobs? Savings? Credit? Could you please discuss this in terms that the average investor could understand? Thanks.

Adam Davidson: At the end of the day, the economy is people making things and doing things that other people want enough to pay for them.

That's it.

When people figure out how to make more stuff or do more stuff than they used to, the economy grows. That's because there's more stuff to go around.

I have to believe that--no matter how this all plays out--there will be people making stuff and doing stuff that other people want. We'll be constantly tinkering and figuring out how to make and do more.

The economy will grow. Eventually.

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DC: Who would have ever thought the Bush and Chavez have so much in common. Both governments are taking over the banking industry.

Adam Davidson: It is a funny quip.

I think it's a bit far fetched, though.

Chavez and Bush--forget that Chavez and Obama--have fundamentally different views of the relationship between an economy and the government.

There is no serious comparison to make, I'd say.

Part of the general US view is that, in extraordinary times, the government steps in to steer the ship.

Chavez's view is that the government should be steering all things at all times.

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Oakton, VA: Slightly confused here. Are money market funds different that bank money market accounts? Are the money market accounts at banks insured by the FDIC?

Adam Davidson: The FDIC answers your questions here:

http://www.fdic.gov/consumers/consumer/information/fdiciorn.html

A money market fund is a mutual fund that invests in short term bonds and notes. It doesn't invest in stocks, like a more typical 401(k) type mutual fund. It invests in US government debt and the debt of corporations and municipalities.

a money market fund swings with the market. It goes up and down minute by minute, day by day. All of your money is at risk, though they rarely lose money.

A bank money market account is FDIC insured. A brokerage money market fund is not.

Check your financial institution website. The ones that are FDIC insured make sure to display that prominently.

If you have any doubt, call and ask.

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Washington, DC: Was this situation inevitable since the repeal of Glass-Steagell, which was put in place to prevent another Depression? Are we so dumb that we have to do the exact same thing every 80 years?

Adam Davidson: I posted about this earlier.

According to my reading and the economists I have spoken with--left and right--the idea that Glass-Steagall cured the Great Depression or that it's repeal caused the next one is widely discredited.

I found this helpful:

http://tinyurl.com/4h6k5t

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Washington, DC: I understand your sentiment that for the most part these guys weren't "thieves." I have friends at Lehman, and I feel for them. But I think they were simply "human beings." People don't work on Wall Street to make the world a better place, or even to make their firm a better place. They do it to make a buck, and the most rational motto of the broker is "IBG, YBG." -- This may blow up down the road, but by then I'll Be Gone, You'll Be Gone. And because human beings aren't immortal, free market incentives just can't be counted on to regulate the long- term stability of the market. I don't blame these guys. I blame the system -- the government, the media, the public. The enablers.

Adam Davidson: The succesful financial institutions seemed to have crafted a decent balance between pure hunger for profits and conservatively managing risk.

The least succesful, clearly, did not.

There is no question, I'd say, that the case has now firmly been made for responsible risk management. Hopefully, we'll learn the lesson.

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Bethesda, Md.: I'm one of those oddballs who believes in taxes and in government helping out the little guy etc. But, to lay it on the line about the bail-out, what's in it for me? Besides the reemergence of the bread line, I mean. Down the line, when the dust settles, how will this benefit a taxpaying, small-investor, average Jane like me? This is the second major financial crisis my retirement account will have to "recover" from (the first being the internet bust) and if there's generally nothing in it for me in terms of regulations and a healthy federal budget funding social programs and infrastructure instead of financial bailouts, then shouldn't I just put all my money in an plain old savings account and avoid the third financial crisis ten years from now?

Adam Davidson: If you want a benefit other than the avoidance of a crisis, I'm having a hard time coming up with anything.

I'd say this bailout is not good for you or me, other than to keep away the bread lines.

The best we can hope for is that the government and private sector and us in the media will learn a lot of lessons and do better in the future.

My hunch is that we'll learn some lessons, do some things better and other things worse.

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Look, I would guess that every person who has been fired or lost their job in the last few days and months is a lot richer than I am.: Uh, there are lots of admin and support people who were probably making far less than you - admins, treasury assistants, accountants, accounts payable clerks, etc. They're wondering how to pay their rent/mortgage, car notes, health insurance and where they'll find a job, with so many other people looking. You media types are always poormouthing. Not everyone at these places made 6 figures with million dollar bonuses.

Adam Davidson: That's a very fair point. You're right.

Add to that: livery drivers, waiters and waitresses, etc.

I live in NY. they say (I don't know if it's true) that every Wall Street job helps create two other jobs.

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Arlington, VA: I've never paid much attention to finanical news - until now. I realize that what's happening is important, but as a complete beginner I don't understand what's happening! Is there a resource I should look at that can explain these issues to me?

Adam Davidson: Funny you should ask.

I'd recommend our new blog and podcast: npr.org/money.

As for books, some basic ones I like are Charles Wheelan's Naked Economics and Tim Harford's The Undercover Economist.

I will say--since I was once a beginner--that economics seems overwhelming at first. Seems boring and dense and confusing.

But once you get the feel and logic of it, it's really quite a wonderful intellectual tool. You can apply it to figuring out family dynamics and politics and lots of other things. Not to mention the crazy news.

Good luck.

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Woodbridge: I'm convinced the end of the world has come:

(1) hardly any U.S. heavy industry or manufacturing jobs left (2) just about everything outsourced, even down to pet food (3) no one seems to want whatever it is we do make (4) we're going to be asking China in the next 20 years for everything.

It is not our job to give China (or anywhere else) our jobs. This is why we became so reliant on the real estate industry - it created jobs! WHY have we done this to ourselves?

Adam Davidson: Wow. End of the world?

I think that's wrong, I'm very happy to be able to say.

The evidence is clear to me: overall, global trade has benefitted the US far more than its hurt (although some people did, of course, feel a lot of pain). The overall benefit is good.

It's good for our long term economy that China develop. But we're not trading with them out of charity. We're trading with them, simply, because we like the stuff they make at the price they make it.

And that frees us up to make more valuable things than Pet food.

Yes, there are fewer manufacturing jobs in the US than there used to be.

But, the hope is that there will be higher paying jobs in other parts of the economy.

I don't see the connection between jobs and real estate that you made there.

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Houston: My 86-year-old mother has all of her money in mutual funds through Raymond James, and lives off the dividend income, which is modest. She has vivid memories of the Depression, and is calling me in a panic asking if she should sell everything. What should I tell her?

Adam Davidson: I do not think an 86-year-old should be living off mutual funds unless they are conservative money market funds.

If they are stock funds, than your mother has been taking large risks.

I would find a sensible financial planner. Don't panic and make any sudden moves.

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Boynton Beach, Fla.: You wrote, "Also, if investment banks get FDIC insurance, that will come with a lot more regulatory oversight."

Unfortunately, "regulatory oversight" failed to prevent the Washington Mutual meltdown. Regulatory oversight only works when there really is regulatory oversight. When there is political pressure to relax such oversight (and there always will be!), then that's not exactly a comforting thought for our long term economic well being.

Adam Davidson: Regulatory oversight doesn't mean eliminating all risks. It means managing the risks so they don't become systemic and take down other institutions.

Even regulated companies can fail. That's OK. We just don't want them bringing us all down with them.

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Adam Davidson: Thank you all very much. This has been fascinating.

I now have to run and finish my story for tonight's All Things Considered.

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Editor's Note: washingtonpost.com moderators retain editorial control over Discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions. washingtonpost.com is not responsible for any content posted by third parties.


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