The nation’s financial crisis has intensified as federal regulators seized Washington Mutual on Thursday in what is the largest bank failure in American history. Federal regulators have arranged to sell off most of the bank at a bargain rate to JPMorgan Chase. We get analysis from New York Times columnist Paul Krugman and economics professor Michael Zweig. [includes rush transcript]
This is a rush transcript. Copy may not be in its final form.
JUAN GONZALEZ: The nation’s financial crisis has intensified as federal regulators seized Washington Mutual on Thursday in what is the largest bank failure in American history. Federal regulators have arranged to sell off most of the bank at a bargain rate to JPMorgan Chase.
In Washington, talks have fallen apart over a $700 billion bailout of the financial industry due to opposition from Republican lawmakers in the House. On Thursday afternoon, President Bush hosted an extraordinary summit at the White House with John McCain, Barack Obama and congressional leaders. Bush warned participants, "If money isn’t loosened up, this sucker could go down.”
AMY GOODMAN: Tonight’s presidential debate in Mississippi remains up in the air as John McCain has threatened to skip the debate if there’s no agreement on a rescue package. Meanwhile, unemployment filings have reached their highest levels since just after the September 11th attacks.
We’re joined right now by two guests to talk about the economic crisis. Paul Krugman is a professor of economics and international affairs at Princeton University, a columnist at the New York Times. Michael Zweig is professor of economics and director of the Center for Study of Working Class Life at the State University of New York at Stony Brook. His most recent book is What’s Class Got to Do with It?: American Society in the Twenty-First Century.
We welcome you both to Democracy Now! Paul, let’s begin with you. What’s happening right now in Washington? What do you feel needs to happen? And what about House Republicans walking out on this deal? Do you agree that they should have?
PAUL KRUGMAN: No, they shouldn’t have. Look, this is scary. We have a freezing up in the financial markets, and while that can seem abstract and nobody sheds any tears for Wall Street, it does kind of mean that there’s a lot of sand in the gears of the machine, and it’s — we’re not sure how bad it is, but it does mean that it’s probably going to start to get really hard for small businesses to get credit. It’s going to be — you know, this is — looks kind of like — it’s got a family resemblance to what happened in the early 1930s when the banking system fell apart. And so, you want some kind of rescue.
Now, we had this intense fight. The Bush administration came up with a God awful proposal: basically, you know, give us total authority, no checks and balances, and we’ll do — well, we won’t say what. And Democrats in Congress negotiated to something, which, while it’s not something to cheer, is a lot better, and then it appears that House Republicans have blown it up. And this is not good. This just means that we might be — let’s put it this way, even in my worst imaginings, I never thought that Republican ideology would bring us another Great Depression, and now I’m not so sure.
JUAN GONZALEZ: Well, Paul Krugman, in the failure of Washington Mutual, I was surprised, the indications of the fragility of the system, because according to the reports in today’s New York Times, the cost of the Federal Deposit Insurance Corporation, for instance, coming in to guarantee the deposits of the depositors of Washington Mutual could be as much as $30 billion, when the entire fund of the FDIC right now is at $45 billion. And that’s why they had to move so quickly, apparently, then to do the fire sale with JPMorgan Chase. But it does indicate that there is an enormous fragility in terms of the so-called safety net for banking in this country.
PAUL KRUGMAN: You know, I don’t take that seriously, although it is true. Strict — literally, the fund is close to being broken. The money will be found. You know, the bank deposits — thank FDR for this. Bank deposits are not really — are not really the risk. They are insured. The federal government will come to their rescue. And look, in the context of what’s going on now, $30 billion, it doesn’t look like it’s going to cost anything like that. It might not cost anything, in this case, but that’s not a lot of money relative to what’s going on.
Now, but the fragility of the rest — I mean, basically, look, the indicator that people like, you know, the economists, finance people have been looking at is, people have been buying US government debt, short-term US government debt, at practically zero interest rates, because they’re absolutely terrified of lending money to each other. They’re piling into the — what’s still considered a safe asset, which is US government debt. I guess it’s safer than anything else, because if the US government goes, then so does the whole world. But, you know, this is — we are pretty much at — we’re at something that looks like it could be 1931. I mean, I don’t think — it’s not my sort of main central forecast, but wow, this is meltdown territory.
AMY GOODMAN: So, how do you think it needs to be staved off, what happened?
PAUL KRUGMAN: Oh, what always happens in — when governments finally come to grips with financial crises is they temporarily take over part of the financial system. You look at Sweden in the early 1990s, they basically seized more than half of the country’s banking system, paid down — paid off some of the debts, wrote off the worthless assets, and then were able to privatize them again. In our own savings and loan crisis, basically the federal government took control of failed savings and loans for awhile. And in the end, you basically have to do that.
It’s temporary. You know, these are [inaudible] words these days, but temporary nationalization in a financial emergency is always the way to go. But we haven’t come politically to grips with that yet. This deal, which was — at least was a step in that direction was blown up by House Republicans who are saying, “Oh, well, we can solve this by cutting the capital gains tax,” which is sheer insanity, or maybe it’s a big joke. But it just tells you how far we are from being ready to deal with this.
AMY GOODMAN: I wanted to play for you Republican vice-presidential candidate Sarah Palin’s comments on the bailout. She was interviewed by CBS’s Katie Couric. Couric appeared on The Early Show and introduced part of her interview with the Alaskan governor.
KATIE COURIC: She’s not always responsive when she’s asked questions and sometimes does slip back to her talking points, so it was a really interesting experience for me to interview her yesterday.
MAGGIE RODRIGUEZ: Let’s see if that’s the case here. We have an excerpt where you ask her about her opinion on the bailout.
KATIE COURIC: OK.
Why isn’t it better, Governor Palin, to spend $700 billion helping middle-class families who are struggling with healthcare, housing, gas and groceries, allow them to spend more and put more money into the economy, instead of helping these big financial institutions that played a role in creating this mess?
GOV. SARAH PALIN: That’s why I say, I, like every American I’m speaking with, we’re ill about this position that we have been put in, where it is the taxpayers looking to bailout. But ultimately, what the bailout does is help those who are concerned about the healthcare reform that is needed to help shore up our economy, helping the — oh, it’s got to be all about job creation, too, shoring up our economy and putting it back on the right track. So, healthcare reform and reducing taxes and reining in spending has got to accompany tax reductions and tax relief for Americans. And trade, we have — we’ve got to see trade as opportunity, not as a competitive, scary thing, but one in five jobs being created in the trade sector today. We’ve got to look at that as more opportunity. All those things under the umbrella of job creation. This bailout is a part of that.
AMY GOODMAN: Republican vice-presidential candidate Sarah Palin on CBS. Paul Krugman, your response?
PAUL KRUGMAN: You know, I’m sorry, but, you know, I am a college teacher, and that sounds like nothing so much as a freshman who hasn’t actually done any of the — read any of the readings and is confronted with an essay question on the exam, and so he throws in sort of random paragraphs of stuff that he thinks kind of sounds like economics. That was incredible. That was totally incoherent.
JUAN GONZALEZ: Michael Zweig, I’d like to ask you, in terms of the impact on working people in the country of this — even of the proposed changes that the Democrats have put into the package yet that is still to pass?
MICHAEL ZWEIG: Well, I think we have here an example, another example, of how Wall Street and the needs of the corporate elites suck the oxygen out of every discussion about what working people need. If we look, for example, at what underlies this crisis, is the junk mortgages that were given out, those low subprime mortgages, those haven’t gone away. Those are going to accelerate. Those foreclosures are going to accelerate in the next six months, eight months, until the spring of 2009, which will be the end of the two-year reset period for the last of those mortgages. So we’re going to see over a million homes go in foreclosure in the next six months. And nobody is talking about that anymore.
And I think that that’s an indication of the kind of priorities that are skewed. I think that there is a problem on Wall Street, that something does need to happen there, but to have this tremendous attention just to that without talking about what’s really going on the ground with people who are losing their jobs, with people who don’t have, you know, health insurance, with people who don’t have their homes and are not going to have them in the next six or eight months, I think that’s taking us in a wrong direction.
AMY GOODMAN: We’re going to go to break, then come back. Professor Michael Zweig from Stony Brook University, State University of New York, Stony Brook, and Paul Krugman, New York Times columnist and professor at Princeton University.
AMY GOODMAN: Our guests are New York Times columnist Paul Krugman, professor of economics at Princeton University, and Michael Zweig, professor of economics at the State University of New York at Stony Brook.
Paul Krugman, on the issue of oversight, Section 8 of the proposal that was put before the Congress —-
PAUL KRUGMAN: Yeah.
AMY GOODMAN: —- your response to how much power Henry Paulson would have, and what you think needs to happen?
PAUL KRUGMAN: Well, I think that, fortunately, that appears to be off the table. Yeah, the proposal over the weekend was just — was incredible. I mean, I actually have the suspicion that the legal department of the Treasury has to include some Democratic moles, because it was so outrageous that it shocked whatever credibility Paulson might have had. It was basically — it said — there are actually two clauses. There was one earlier that said that this is going to be completely at agency discretion. In other words, the Treasury Secretary can do whatever he feels like. And then this Section 8, which said that his decisions shall not be subject to review by any court or any agency. So I could do whatever I feel like, and then I get — you can’t second-guess me after the fact. That’s — you know, Romans would appoint a dictator in times of emergency, but part of the deal was that the dictator could then be held accountable for his actions afterward. This was like nothing. This was appointing Henry Paulson as Stalin.
And so, actually, the deal we thought we had yesterday wasn’t great, but it did have an oversight board with — an independent oversight board with cease and desist authority, so they could just tell Paulson or whoever it is to stop. And they had some other layers of accountability in it, which is better, because this thing, this crisis is going to last well into the next administration, and even if you think that Henry Paulson is a saint, which I don’t, who’s the next Treasury Secretary going to be? You know, Phil Gramm? Or — you know, I’ve tried to come up with some liberalish name that might scare the Republicans as much as Phil Gramm scares me, and actually the only name I’ve been able to come up with is me. But, you know, the next Treasury Secretary — this is crazy. But, you know, that, I think, is off the table now.
What we’re now talking about is pretty much whether a plan devised by Barney Frank and Chris Dodd is going to be hammered together or whether we’re just going to see nothing at all.
JUAN GONZALEZ: Well, Paul Krugman, some of the Congress members that I spoke to late last night were saying that they were close to making major changes in the deal, even holding back some of the $700 billion, only giving perhaps $250 billion immediately, but that the main thing that the Republicans were strongest in refusing was the issue of having some kind of changes in the bankruptcy laws to allow judges to deal with individual mortgage holders in a case-by-case basis. But they claim they’re still going to have some kind of protection for mortgage holders who are in problems with — in their legislation. But my question is, how can they? Because if the government buys these securities instruments, there are thousands of thousands of individual mortgages in each one of these instruments. Picking them apart one by one and deciding which ones — I mean, can that be done?
PAUL KRUGMAN: It’s unclear. And I have never thought there was any good economic argument, or legal argument, about not letting judges do this. I mean, we — you know, we have a bankruptcy law for a reason. And it does give the court system the ability to say, look, alright, this person can’t pay; we’re going to — you know, why should mortgages be any different from anything else? Why should an investment banker who’s gone bust find he has ways to protect, you know, parts of his ill-gotten gains, but a homeowner who’s gone bust for — you know, just because he was mis-sold a bad mortgage has no ability to protect his home? So, this is certainly the right thing to do. You know, it’s important.
The most important thing, I thought, was that the government gets some ownership in return for saving firms. So, my key issue, which — we don’t know — which is in there, but we don’t know how — we don’t have the numbers, is equity stake, but this is also important.
AMY GOODMAN: We’re talking to Paul Krugman, professor of economics and international affairs at Princeton University; Michael Zweig, professor of economics, director of the Center for Study of Working Class Life at State University of Stony Brook. So, what do you feel, Professor Zweig, needs to happen right now?
MICHAEL ZWEIG: Well, I think that we need to look at the financial markets in the context of the needs of working people, in the context of the needs of most people in the country.
AMY GOODMAN: And is there time to do this right now?
MICHAEL ZWEIG: Well, I think so. I think that, you know, the emphasis on “we have to do this now, we have to do this this week,” it’s sort of like Hank Paulson’s version of Condoleezza Rice’s mushroom cloud. Otherwise, you know, we — give us all the power, give us all the authority, let’s not think about this too carefully, and then we’ll fix it later, if there’s anything to be fixed. Well, you know, pass it and fix it is not exactly the right way to do things; it never has been for any progressive agenda.
So, I think that the point of departure needs to be, what is it that working people need? And what they need is the kind of mortgage relief that we were just talking about. What people need is jobs and unions to get better working conditions when they get those jobs, to relieve the kind of economic distress which is so widespread in this country. The financial markets do need to be functioning. You know, you can’t have an economy that has frozen financial markets where nobody can get a loan. But I don’t see that you need to put that front and center to the exclusion of any discussion of what it is that ordinary people need.
AMY GOODMAN: Paul Krugman, are you concerned about a country with such tremendous military might, the United States, the most powerful militarily on earth, that is economically crippled, what could happen then?
PAUL KRUGMAN: Well, yeah. I mean, a friend I was talking to last night, as everything went to hell, said, you know, we’re turning into Argentina with nukes. This is not — this is not encouraging. I mean, you know, what are we — we’re not going to, I hope — actually, I shouldn’t say that. I was going to say, you know, we’re not going to start trying to conquer our way out of debt, but God knows, if we have this crew still in power next year, who knows what they might try?
But it’s — you know, we’re the linchpin of the world system, like it or not, and if the United States is in a financial mess and in a political deadlock, which is where we seem to be, this can’t be good for the world. I have to say it, the reaction I had — I mean, I used to do a lot of third world disaster stuff. I was kind of an ambulance chaser. And looking at this, the scenes that we saw last night were the kinds of things you expect to see in Buenos Aires or Jakarta or Bangkok, not in the United States. But I guess we aren’t that country anymore.
JUAN GONZALEZ: And what does this mean for the next president, in terms of their ability to move forward on an agenda, whether it is Obama or McCain? What’s this going to — how is this going to affect their first couple of years in office?
PAUL KRUGMAN: If I was Obama, I would say, look, this is a one-time expense, where it’s not an ongoing budget deal. And, in fact, one of the things we can do to make future expenses like this less likely is to have a sounder, fairer economy. And he should not allow this to derail. At one time — just as Bush has not allowed the immense cost of the Iraq war to change his goals, with much better justification Obama should say, look, healthcare reform, which is going to be the most expensive item, is too important, it’s a permanent, long-term thing, we do not — we’re not going to allow this needed financial reconstruction to stop it. Remember, FDR, Franklin Roosevelt, in the New Deal had to rebuild the banking system. That didn’t stop him from going ahead and creating Social Security. So we should not let this change our course.
AMY GOODMAN: Well, as President Bush was holding an emergency economic summit at the White House, protesters took to the streets all over the country to oppose a Wall Street bailout. In New York, a series of demonstrations occurred near the Stock Exchange. This is a sampling of some of the voices on the streets.
PROTESTERS: We paid, we own! Foreclose Wall Street, not my home! We paid, we own! Foreclose Wall Street...
PROTESTER: People on Wall Street do not know the difference between right and wrong. They do not know that it’s wrong to lie, it’s wrong to steal. And then they make a few mistakes, they want us to pay for it.
ARUN GUPTA: They may give it some window dressing about limiting executive compensation, but the real goal is to transfer huge funds to the investment banks, to the hedge funds, to central banks that created this mess in the first place.
PROTESTER: This is like one, two, three: one, the Iraq war, $700 billion out of our back pocket; two, the energy situation, the record profits while we pay for it at the gas tank; and now, three, Wall Street, in terms of looking for another $700 billion on top of all that’s been done.
PROTESTER: So I’m very concerned about the economic circumstance right now, and at the same time trying to understand what is happening and what the things that the politicians are trying to do.
PROTESTER: ...the have-nots, when the haves just keep on having. [inaudible] I go to college. I have a job.
PROTESTER: You’re talking about a bailout for, like, some of the wealthiest banks in the world, but yet we can’t seem to help our own citizens who are having foreclosure crises. I mean, in President Bush’s speech the other night, he mentioned all the reasons for the mortgage meltdown but didn’t once mention predatory mortgage lending.
AARON MATE: What’s your thoughts hearing this protest today?
WALL STREET INVESTOR: Look, I totally understand their issues, but I think not bailing out will end up being worse for the country as a whole.
WALL STREET INVESTOR: Come up with another solution. I mean, there is no solution. I mean, I think that the government should get a lot of equity for what they purchase, but there’s no option.
AARON MATE: Which isn’t being proposed right now, though. So do you support the bailout in its current incarnation?
WALL STREET INVESTOR: Something that’s been done. You pull something that’s already been put on the table now, the country will go into a spiraling depression.
WALL STREET INVESTOR: I think it’s great for the economy, and obviously there will be a massive downturn if the government didn’t bail them out. I mean, Wall Street is a massive part of the US economy. If that was to crumble, then a lot of the knock-on effects would happen. The housing market would go down. I think there will be a detrimental effect to the whole US economy if that happened.
WALL STREET INVESTOR: OK, it seems like a lot of money at the time, but it’s all going to get paid back in eighteen months. So they’re coming together. All these companies are going to be — have to refinance. It’s not as if the US government isn’t going to see this money again. And in terms of the economy in the long run, a company like AIG, if that goes down, those knock-on effects is going to go right down to the consumer.
WALL STREET INVESTOR: Personally, I’m a firm believer of, you know, if the company choose to fail, you know, let them fail. But if it’s going to trickle down to everyone else, you know, we’d have to see what the real details are.
PROTESTER: I am amazed that the federal government has so much money to bail out the investment companies that have made unwise decisions and created huge losses to their shareholders, while they always say they don’t have money for things like affordable housing and more parks and healthcare.
PROTESTER: When the financial guys win, they win alone. And when the financial guys lose, the taxpayers losing. That, it’s not fair. It’s not justice.
AMY GOODMAN: Voices outside Wall Street here on Democracy Now!, democracynow.org. Special thanks to Aaron Mate and Hany Massoud. I’m Amy Goodman, with Juan Gonzalez. Also, thanks to our guests Michael Zweig of Stony Brook and Paul Krugman of Princeton University and the New York Times.