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The Financial Crisis And You: Planet Money on Crisis Basics

Alex Blumberg
Contributing editor for NPR's "Planet Money" and producer for "This American Life."
Wednesday, October 15, 2008 11:00 AM

Alex Blumberg of "Planet Money" and "This American Life" was online Wednesday, Oct. 15 at 11 a.m. ET to offer some "Crisis 101" explanations about the current state of the economy and takes your questions about the proposals to improve the situation.

Submit your questions and commentsbefore or during the discussion.

Blumberg is a producer for This American Life and is a contributing editor to NPR's new financial podcast, Planet Money.

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Alex Blumberg: Hi everyone. Welcome to the chat. I can't promise I'll be able to answer all your questions. But I'm looking forward to trying.

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Michigan: This might be a better question for the Project Money podcast, but here goes:

Since you guys have been explaining everything so well, I was hoping you might explain this--why, when the economy tanks, I can fill up my tank for less? What is the pressure on oil prices? Less demand? I know it's not the dollar, but I can't figure out what the lever is in a falling US economy that forces down oil prices. I'm sure it's fairly obvious, but I haven't heard it addressed. Thanks.

And thanks for all of the great podcasts. The Giant Pool of Money was one of my all time favorite This American Life shows.

Alex Blumberg: From what I understand, it's simple supply and demand. Declining economy = less driving. Less driving = less demand for oil. Less demand for oil = lower oil prices. I'm pretty sure it's that simple.

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Anonymous: Does Bank intervention mean the beginning of the end for the free-market economy?

Alex Blumberg: I'm not sure, but I think people have been predicting the beginning of the end of the free-market economy for as long as there's been a free-market economy. This is a very scary time, but I don't think it means the end of the world as we know it. I'm pretty sure that we can take the government at its word that it has no desire to be in the bank-owning business. If the government was taking equity stakes in banks because it wanted to, and not because it needed to, then I think it would be a different conversation.

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Lake St. Louis, Mo.: Can banks look at the balance sheets of other banks? I've read that the credit default swaps are not on the balance sheets, and from what I've gathered, the banks aren't lending to each other because they fear bank failure.

If credit default swaps are the unseen source of this fear, then could the world's governments force the cancellation of all credit default swaps, at least temporarily, while figuring out how to regulate them properly? Since netting appears to tie many institutions together like an unholy chain of dominoes, maybe this will set the dominoes further apart? These risk management tools have put the whole system at risk, so why not make the sellers buy them back at a prorated price?

Alex Blumberg: From what I understand, this is the crux of the problem -- you can't really tell what's going on in another bank by looking at its balance sheet. And credit default swaps are only one part of that. Entire classes in business schools are devoted to deciphering a balance sheet. And from what people tell me, there's just a lot that's opaque.

As for forgiving CDS debt, I don't even want to speculate at what kind of unintended consequences a move like that could unleash. Not to say that it might not be the right move. I just don't know enough to say.

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Durham, N.C.: Ever since hearing about the TED Spread on your podcast, I've been watching it and it hasn't budged from the all-time high it reached last week. Are we really out of the woods?

Alex Blumberg: Definitely not. Not out of the woods. I've been watching it too.

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Cologne, Germany: Hi Alex, I'm a big fan of "This American Life".

In the episode My Two Cents you explained how you lost much money in the first "Internet bubble" by investing without understanding the first thing about stock market. It's interesting how you became curious.

How do you became the host of an show about economy. Or let us rephrase it: Do think it's important to be an outsider in the financial market to find ou what went wrong? And to explain it to the "Main Street"?

And in another episode of TAL, I found a text from Lee Sandlin about losing wars. He explains the refusal of the Germans and Japanese to surrender, because this would mean taking responsibility for the inescapable. Did something like this happen in the financial market?

Alex Blumberg: I think about that lee sandlin piece all the time now. I do think something like that is going on. It's hard to admit to yourself that you've screwed things up this badly.

And as for the insider/outsider question -- I think both are valuable. I do think it's good to have people like me who can ask dumb questions, that might not occur to someone on the inside.

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Virginia Beach, Va.: It appears that those of us with the bulk of our retirement assets in 401k accounts are really "stuck." We can't move funds into the money market accounts because the funds are insured only up to deposits as of 9/19/08. Bond funds are losing money, too. We can't take the funds out and put them into insured CDs or munis without paying a huge penalty.

So, how are we ever to recover the massive losses we've incurred over the last months? Will we ever be able to retire comfortably?

Alex Blumberg: I really don't have any answers for you. I sympathize. It's scary. But this is a situation where it really is better to talk to an insider/expert. For what it's worth, I do think stocks will eventually recover. But I, like everyone, is just not sure when.

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Chicago: Planet Money and others have noted that the language allowing the Treasury Secretary to directly inject capital into banks by purchasing shares was inserted into the legislation at the last minute, using somewhat cryptic language. What is the likelihood that we will ever learned who exactly inserted this language? It seems like this crisis would now be far worse if that language hadn't been inserted.

Alex Blumberg: It's anybody's guess. I've heard rumors that Bernanke himself wanted it, and worked back channel to make it happen. But we'll probably never know. Or at least, not for a while.

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Reston, Va.: We were about to put a small chunk of money into an aggressive college fund for our toddler, but now are wondering if we should keep that money in our savings account instead. Since we have about 15 years until college, is it smart to put the money in and hope the market takes care of it by the time she's ready to leave the nest?

Alex Blumberg: I'm not a financial manager. But I'll offer my two cents. Investing in stocks right now, you're sure of one thing, you're not buying at the peak. So, maybe you're not buying at the absolute bottom. Chances are, over the next 15 years, they'll grow to be worth more than they are right now. And the market will probably beat a savings account.

But again, talk with lots of people besides me about that.

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washingtonpost.com: Lee Sandlin's story about losing wars was part of the War Stories episode.

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Geneva, Switzerland: People talk a lot about the great losers in this crisis, the ones experiencing difficulties, leading to restructuring, mergers, etc. But after the crisis is gone, whenever it may be, who do you think will win from this situation? How will the world look after the storm is over (not just financially but also politically)? In the program "The Great Pool of Money" I remember you mentioning that China had 1 trillion dollars in its Central Bank, but a few days ago I read in Bloomberg.com that they now have 1.9 trillion, and it doesn't seem to stop. Santander is in a buying spree, getting advantage of the "sale prices" of institutions experiencing difficulties. Russia will probably lend Iceland billions so that it can have a significant influence in that delicious part of the globe. For me, it seems that some seem to be trying to get a (long-term) profit out of this situation...

Alex Blumberg: There are entire research papers and books to be written about exactly this question. But I think within your question is part of the answer. The people who have lots of cash on hand now, they'll come out on top.

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Austin, Texas: Alex, I wonder if you can talk about the TED Spread. I've been keep an eye on it since I heard you talk about it on TAL -- is it making real downward progress, or are the banks still scared you-know-what-less to lend to each other?

Alex Blumberg: yep. the TED is still high, and banks are still scared. we're definitely not out of the woods, not by a long shot.

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Ithaca, N.Y.: What changed, exactly?... The money markets are still frozen and there is little or nothing to stop all the bailout money from being sucked right through the system and into the pockets of bank shareholders, bank executives, and all the Wall Street delinquents who got rich by inventing the voodoo financial instruments that caused the mess. What, in a fundamental way, is different now that the planet-wide bailout has been announced?

Alex Blumberg: I know. I think it would be too much to hope that the minute this thing gets passed, everything goes back to normal. But the progress hasn't been encouraging. That's what we're all watching for, to see if it starts to make a difference.

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Houghton, Mich.: What would a Libertarian do? (and would it better or worse than what is being done?)

Alex Blumberg: A libertarian would let the bad banks collapse, and then hope that the ones that don't collapse step up and start lending. It's unclear if that would be better or worse. Most economists I've talked to and read, think it would be worse. The truth is, we'll probably never know. Most politicians who find themselves in power at a time like this, no matter how free-market oriented, would probably act, rather than run what amounts to a national-sized experiment of their ideological hypothesis.

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washingtonpost.com: Hi Alex, thanks for coming on today. I'm curious about what your emotions and reactions have been while reporting this story. Has your mood followed the ups-and-downs of the market? Has anything made you particularly angry or depressed?

Alex Blumberg: I've gotten a little more anxious over time. But it's tempered by the fact that I really believe something like this was necessary. The bubble had to pop, there were always going to be serious consequences, and now that it's happened, I think we'll be better for it in the long run. It'll just be scary while we get there.

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New York: Is it true that the Hoover administration made the Great Depression happen or made it worse by raising taxes and engaging in restrictive trade policy (Smoot-Hawley), exactly what Obama is promising to do if elected!

Alex Blumberg: It is true that Hoover made it worse. I'm not sure if that's what Obama is promising. I tend not to pay that much attention to promises made in the heat of a political campaign.

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Tulsa, Okla.: Congrats on Planet Money. You're doing a great public service for those of us who have only a vague idea of how economics works.

Alex Blumberg: thanks!

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Boulder, Colo.: Hi Alex, Love the show! It's my only source for what's really what. My question is: what is the likelihood that the markets are going to stay the way they are until after the election? Cathy

Alex Blumberg: I have no idea. But I can imagine them staying this way for a while. Most people think there's going to be a recession and that it will be bad, and markets will probably reflect that for a while.

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Washington, D.C.: Alex, I just wanted to tell you how much the Planet Money podcast means to me. This stuff is so complicated that even those of us working on financial issues from the policy perspective get lost. I am addicted to the podcast.

One thing I'm curious about is how we can prevent these problems in the future. Once we get through this crisis -- I know it will be a hard road, but eventually we will -- what kind of regulatory structure do you think needs to be set up so that this doesn't happen again?

Thanks again for all your work on this!

Alex Blumberg: That is one of the key questions. Regulation is tough. It really can make things a lot worse. It has to be smart. My own personal feeling is that we have to avoid situations like we had here, where there was little regulation, but there were government guarantees if things went bad, in the form of FDIC insurance, and implicit promises to Fannie and Freddie. I think we have to choose one path and stick to it. Low reglation? Then no government insurance. Companies have to be allowed to fail. And if we think they're too important to fail, then we have to have some attempt to regulate them. But the regulation has to be smart. It really is shocking, the more I learn about this stuff, how little most people in congress understand simple economic principles.

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San Rafael, Calif.: Alex, What's your estimate of the total amount of money that the Fed, Treasury, and other governments have been putting into banks and other financial institutions so far?

Alex Blumberg: It's really hard to say. someone has numbers on this, but I'm not sure. it's definitely in the hundreds of billions.

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New York: Alex, if you are an insolvent (or near-insolvent) bank and you take a bucketful of money from the Treasury in this stock-for-capital plan, why wouldn't you just make the riskiest bets possible? If you fail, you and your shareholders lose little (as your bank was near insolvency to begin with) and if you succeed, you've made a cool buck off of Uncle Sam's generosity. Seems like Hank is just encouraging moral hazard here for small banks, no?

Alex Blumberg: I don't follow the logic. They need the money to pay off debts and fill holes on the balance sheet that their bad bets have caused. I don't think they'll be in the mood for more risk. In fact, that's the whole problem here with the credit crunch. Banks are so risk averse now, they won't even lend to more or less safe bets.

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Somerset, Ky.: Alex, I have been following this crisis on your Planet Money blog. My question is how inflation will affect the economy in the long run? Pretending inflation isn't a factor because of other short-term factors doesn't change the facts.

Alex Blumberg: This is a really interesting question. I think Bernanke might be more worried about deflation than inflation. Deflation is what happened during the depression, and that's the real economic killer. And with a huge asset class, namely houses, losing up to half its value in some areas, that can have a cascading effect. Right now, because of turmoil, some prices are going up while others are going down. But I think we'll see food and gas prices go down soon. So, I'm actually hoping for a bit of inflation. It's better than the alternative.

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Charlotte, N.C.: Wells Fargo is reporting 'better than expected' profits today.

Does this mean they will still be able to qualify for help with the new bank capitalization plan?

Thanks for Planet Money!

Alex Blumberg: better than expected can mean anything. Maybe they were expecting to be insolvent. I mean, that's an exaggeration, but you know what I mean. Managing expectations is a big part of announcing earnings to Wall street. If they need help, I'm sure they'll get it. They seem to be one of the banks that's doing better, so I'm sure the Feds would want to help them over a bank that's not going to make it no matter how much capital they get.

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Charlotte, N.C.: Alex, I own a condo in Charlotte that's been on the market for about a month with only one low-ball offer coming in. Would you recommend biting the bullet and simply unloading it now, or waiting to see what happens over the next few months??

Alex Blumberg: I don't think the next couple months are going to change things that much. If you can wait years and not months, then I'd wait. But I doubt things are going to turn around that fast. If you look at graphs of most housing bubble bursts, the downside is a steep drop tapering into a long shallow decline, that usually lasts years. Sorry.

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Anonymous: What are these folks crying about with the free market economy and socialism fears? They sound like a bunch of quacks. All our allies in this world are basically socialist governments. They still have freedoms, they still have wealth. One apparent thing they do have is a government that tends to understand it works for the people and provides base services in response. Lastly, isn't the true economic engine in this country government spending?

Alex Blumberg: This is too much to get into here I think. But basically, yes, Europe tends to do things differently than we do here. Some people prefer their method, some people prefer ours. Trying to figure out whose objectively right is probably impossible.

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Frisco, Tex.: Could you explain what a credit default swap is and when did banks start doing this? Thank you!

Alex Blumberg: I can't right here. But I did so on the radio. So you can listen here:

http://www.thislife.org/Radio_Episode.aspx?episode=365

click on the "full episode" button and you can listen online. The second story in the show is all about credit default swaps.

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Corvallis, Ore.: With 3-month Treasury bonds so low (0.14% last I checked), I suppose there is a bright side to the crisis -- we can borrow our way out of it essentially for free.

But how much longer can we borrow? When do we hit the tipping point that investors decide the U.S. Government is no longer a safe investment? How would we know if investor confidence in the U.S. were waning?

Alex Blumberg: I actually asked an economist that question, and his answer was basically, as long as people are scared to death, the US can borrow money. So it actually sort of works out well. We can keep borrowing as long as we need to, because once fear subsides, we won't need to borrow as much. At least, I hope that's the case.

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Piedmont, Calif.: Hi Alex, Over the weekend and Monday, the U.S. offered dramatic new capital injections to shore up banks. So why is the stock market still falling?

Alex Blumberg: basically, because there's a big recession on the way.

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Boston: Do you know why the government didn't impose dividend restrictions and/or share repurchases in the bank recapitalization? Is it just because they needed to force the banks to accept the capitalization and adding more restrictions would have been too hard?

Is that also why the terms (5 percent dividend, 15 percent in warrants) aren't as good as what Warren Buffett got?

Alex Blumberg: I think you're probably right. But I have no idea. It's really hard to know their motivations.

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Chicago: In a post on Planet Money dated yesterday, Adam Davidson reports that Anil Kashyap is not happy with the way the bank recapitalization is being done by Treasury - "he's upset that Treasury will allow banks to give unlimited dividends to their shareholders." Can you explain a little bit about why this is bad, and is there anything we (as voters, maybe?) can do about it?

Alex Blumberg: It's bad because if they give dividends to shareholders, they won't be making the banks any healthier. Basically, the banks owe billions of dollars to cover bad bets they made. the government's money is supposed to be covering that. If the banks take it and give the money to shareholders instead, then they'll be in the same position they were in before.

Also, shareholders are SUPPOSED to be hurt when the government has to rescue the business. That's what discourages moral hazard. So if the shareholders come out alright, they won't have any incentive to make sure the companies they own don't behave this way again.

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New York: My question is about the longer-term implications of the proposed rescue plans. Both candidates are talking about tax breaks in addition to the hundreds of billions in the rescue package. How are these things actually paid for? Does the national debt actually matter to the real economy and what are the problems with too much debt? Are we in danger of higher inflation rates because so much money is being pumped into the economy?

Thank you.

Alex Blumberg: It doesn't seem like the debt matters that much. I mean, in a perfect world, we wouldn't be putting a trillion dollars on the line, but we're borrowing it for free, and people do seem to think that we'll get the money back eventually.

So, yes it's a problem, but it's not the main problem. And it's not as bad a problem as it could be.

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Reading, Pa.: This crisis is partly due to unregulated firms lacking collateral for "swaps." Are these swaps still being sold? Will they be regulated in the future?

Alex Blumberg: I think they're still be sold. But I'm not sure. They will probably be regulated in the future. Probably by being issued through a central clearinghouse. But again, that's just a guess. I have no actual information. If anyone out there has actual info, I'd love to hear it.

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Cleveland: Is there any sort of equivalent to FDIC for businesses? It seems to me that the potential of small/mid size business failures and a subsequent need to withdraw their money from banks could be a big reason that banks are hording all this money and not lending it to other banks.

Thanks. Love all your work.

Alex Blumberg: I don't know the answers to either of these questions. Sorry. That's what happens when non-experts like me host these things.

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Reading, Pa.: Back in September, Goldman Sachs and other firms announced they were going to become regulated banks. Would they have been ineligible for any government bailout had they not become a regulated bank?

Alex Blumberg: That's not why they became banks. The government could still have bailed them out. The government can bail out anyone it wants to. They became banks because that makes it easier for them to raise money, by accepting deposits. Now they can tell people like you and me, hey, give us 100 grand, we'll put it in a cd, and it's government insured. Before, they couldn't do that.

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Isla Vista, Calif.: LIBOR rates have been higher than they are now (although the TED spread is high, but if a bank is borrowing money from another bank, does the return of Treasuries really matter?). It seems like the problem is not high LIBOR rates, but simply that banks won't lend. Why don't banks just raise the interest rate they're willing to lend at (LIBOR) until the return justifies the risk? Interest rates were at the 10-15% level in the late 1970's, much higher than now, but we didn't call that the crisis of the century. Why such a big deal now?

Alex Blumberg: Well I was just a kid in the late 70's, but I do seem to remember a lot on the news about how bad the economy was. It was a pretty big crisis. As for just raising rates, I'm not sure. I've talked to traders who say what you do, no one's willing to lend at any rate. And if they are willing to lend, it's small amounts of money, at very short durations. Why? That's the big question.

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Ithaca, N.Y.: Suppose that the TED spread stays roughly where it is for awhile: has anyone calculated how long it will be before a significant fraction of U.S. businesses will start finding it impossible to make payroll? How long can they breathe without oxygen?

Alex Blumberg: it'll be different for different companies. Some can do better without credit than others. But that's also the big question. And no one really knows.

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Chicago: A question regarding the Community Reinvestment Act. Of late, I've had some more conservative friends of mine point to this a "the root" of the financial crisis today, or more specifically, to changes made to the act in 1995 that in essence forced banks to make sub-prime loans (the wording I'm hearing, not my own). What's the deal? I'm reading up myself, but I thought I'd ask if you had any insight, or if this might get addressed on Planet Money.

Alex Blumberg: Yeah, I've heard this too. I always worry when anyone says all the blame lies with one thing. I'm especially suspicious of attempts to blame the CRA. It probably had some effect, but saying it caused the crisis? I'm not convinced.

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Glendale Ariz.: I know how weird and socialistic this sounds, but ever since Fannie and Freddie went down I've been seeing more and more emails and blogs about nationalizing the US operations of the Big Five oil companies, although I've never heard it mentioned in the media and I'm wondering if you have.

I'm generally a capitalist, but this argument is making a lot of sense to me since oil should be considered a sunset industry. It would prevent geopolitical or speculative swings in oil prices from damaging the delicate process of recovery from the financial crisis. Prices could be managed to assist a gradual conversion to clean renewables, the profits (above a 5 or 6 percent annual dividend to shareholders) could be used to finance other recovery and bailout efforts, and in a certain number of years the government would return to the shareholders modern energy companies based on clean renewable fuels with a real future, so this would be a long term benefit for the shareholders as well.

If I had asked you about nationalizing AIG two months ago I know you would have laughed in my face. Is this idea still too crazy to talk about on radio?

Alex Blumberg: I don't think it's too crazy to talk about. I'll look into it. I haven't heard about it, but I'll check it out.

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Fayetteville, Ark.: I would like to see expansion of the encouragement of savings through raised limits and expanded ways to contribute to IRAs. Wouldn't this help the banks with capital and individuals save in the long term? Is anyone thinking or talking about this for the next Congress? Let's reward good behavior.

Alex Blumberg: I'm sure someone's talking about it. But I don't think it's front and center. Basically, as I understand it, there's a bit of bind re: personal savings. If people save more, which they should do, they spend less, which further weakens our already weak economy, which increases job losses, which diminishes everyone's ability to save. But on the other hand, it was spending beyond our means that got us into this mess. It's a tough situation. I'm glad I won't be the one who has to figure it out.

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Sherman, Tex.: Is there a short answer for why deflation is worse?

Alex Blumberg: Probably. But I'm not sure what it is though. I do know it's worse.

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Washington, D.C.: When asked about the cost of the bailout, Congress and the White House are quick to point out that we may recover part of the $700 billion cost eventually, so it's really not as high. But the reality is that we'll be adding to our national debt; we don't have this money on hand, and because we need to borrow, to measure the true cost of the bailout, we also need to factor in the interest we are going to pay on this for decades to come. What do you think the true cost of the bailout is (considering that we may get part of the principal back but we'll still have to pay interest)?

Thanks as always for the fantastic podcast and all your insights.

Alex Blumberg: well, we won't have to pay that much interest, since we're borrowing the money essentially for free right now. So, it's basically like putting it on a credit card with a 0% APR teaser rate. And I do think there's a fair chance we'll get the money back. We did with the Chrysler bailout.

But you're right, it does hamper our ability to borrow more.

I'm afraid this is my last answer, everyone. Thanks so much for participating. I hope it was helpful.

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