20081218 wall street sign 18
A Wall Street sign in New York City's financial district. - 


Kai Ryssdal: As Mitchell Hartman explained to get us going today, as bad as the GDP number was, it could get worse as the economy unloads all that built-up inventory. To help digest that fact and to wrap up the happenings from Wall Street this week and beyond we've got Felix Salmon from Portfolio.com with us once again, also Megan McArdle from The Atlantic. Good to have both of you here.

Felix Salmon: Good to talk to you, Kai.

Megan McArdle: Thanks for having me.

Ryssdal: Megan, I'm going to start with you. And obviously, we have to go straight to the GDP numbers today because that's the headline story. I'm wondering if you think that now, finally, everybody's going to get it -- that this is bad and getting worse?

McArdle: There's this really interesting question about this. You know, I think what we're looking for, right, is for the market to capitulate -- to admit that everything's bad and then start growing again. But, the sort of paradox of capitulation is as long as people think that it's capitulated, you haven't capitulated yet. As long as you think that it's going to go up sometime in the near future, you haven't actually emotionally taken it all in.

Ryssdal: Alright. Wait a second. You mean, after last fall and the ride that we've had, the market hasn't capitulated yet, Felix?

Salmon: I think she's right, actually. I think the market has been sort of moving sideways for the last couple of months. And it's been going up and down randomly, but I haven't seen this kind of 'oh wow' -- things are actually, genuinely worse than we thought they would be in November. When, in fact, they are genuinely worse.

Ryssdal: Yeah. I want to go back to something you said, actually, when we had you on maybe six weeks or two months ago. You said "It's going to get worse before it gets worse." Is that what we're seeing now?

Salmon: Yeah. This is the first getting worse. And the next getting worse is going to come along in the next couple of months.

Ryssdal: Megan, what do you say? Another couple of months until it gets worse, yet again?

McArdle: There's a history with these financial crises of, you know, there's a lull. It's like you go through the eye of the hurricane and everyone starts to think, OK, maybe that was it. And then something hits again. And, you know, in the Great Depression you had the first banking panic in 1930 and the second in 1932. You know, the fact is that people sort of step back. They think they've seen the worst, and then they start to really getting to down to fairly valuing the assets that have gone bad. Whether we nationalize or buy the assets, or whatever we end up doing, we're going to push to value this stuff fairly and not let banks throw good money after bad or let it drag down their balance sheets for ten years.

Ryssdal: Felix, let me pick up on that. You've been writing a lot about the nationalization of banks. What's your sense of where it stands in terms of the politics of this whole thing?

Salmon: That's a very good question. At the moment the politics is no where near nationalization. They are quite keen to do anything but nationalization, which I think is a little bit shortsighted. And nationalization makes a lot of sense in this situation. What's quite clear is that right now they only have $350 billion to play with -- the second trench of the TARP money. And they haven't decided what they want to do with that until they really come up with a big strategic solution for the entire banking sector in the United States. And I have a feeling that when that bill comes out, then I think you might start beginning to see the second wave of capitulation, as it were, when people, really it start to sink in that there's three or four trillion dollars worth of losses just sitting in the financial sector, which someone is going to have to take.

Ryssdal: That's a big number, Megan. Three to four trillion. You think that's it?

McArdle: We're in this debate over do we nationalize, do we buy the assets? We don't even know how big the problem is. What about not having that debate yet, and instead, send, you know, take all these layed-off bankers, build some crack teams of auditors and send them out to figure out what's on the books?

Ryssdal: Alright. So, Felix, what do you think we ought to do next? If Megan wants to figure out what the problem is, what about you?

Salmon: Well, Megan seems to believe that it's possible to look at a bank's loan book and put a value on it and be able to just quantify these things. And I don't believe it's possible to quantify these things.

McArdle: No. I mean, I think that Felix does raise a really good point, which is that we are not going to be able to go in -- you know, making in the 1930s was relatively simple -- we're not going to be able to go in and say, you know, definitively exactly what's worth what. But, you know, these sort of more exotic risks with mortgage-backed securities and mortgages and, you know, how far under water are those houses, there are certainly things where you can at least identify the extent of the exposure. You don't necessarily know which loans are going to pay off or not. But you can identify, you know, sort of how deep are these banks in to the kind of securities that are really toxic, rather than just sort of ordinary loans that carry ordinary credit risk.

Ryssdal: It's reassuring that we may possibly never know.

McArdle: We have nothing to fear but fear itself.

Ryssdal: That's right. Megan McArdle at, it's The Business Channel for The Atlantic. Felix Salmon blogs at Portfolio.com. Thanks guys.

Salmon: Cheers, Kai.

McArdle: Thanks for having me.