Checking in on the bailout package

The Federal Reserve Bank

TEXT OF INTERVIEW

Kai Ryssdal: The bailout package is all in American dollars, $700 billion dollars worth, as we know. The news today is that a number of smaller regional banks have signed up for federal cash. Also, that the big names that were strong-armed into taking their share a couple of weeks ago are finally getting their money. To chat about the bailout and who's lining up to get their share we've called economist Doug Elmendorf at the Brookings Institution. Welcome to the program.

Doug Elmendorf: Glad to be here.

Ryssdal: Here we are three weeks after the bailout was signed into law and just this week we are getting the first injection of cash into these banks. How do you feel about that?

Elmendorf: I think the credit situation has improved a little bit, and hopefully will improve much more when the money starts to flow. But that still leaves us with very large financial and economic problems.

Ryssdal: Well give me the top three then.

Elmendorf: Number one: banks aren't lending to households and businesses that need money and are used to being able to borrow. And that contraction in lending is leading to number two: recession. We are going to see declines in output and incomes, and increases in unemployment. Number three problem, is rising mortgage foreclosures that are in some ways at the heart of the financial problem, but will require attention directed at foreclosures themselves.

Ryssdal: It's not just banks of course that are trying to get some of this money, or actually getting their hands on it. Carmakers want some, insurance companies want some. Should we be spreading this bailout money out?

Elmendorf: It's certainly appropriate to help financial institutions besides banks. Turns out that insurance companies are doing a lot of the complicated financial engineering. They are facing the same problems and should be treated the same way. Car companies, or other non-financial companies, it's more complicated. We need to be sure that we're not just prolonging their underlying problems but are giving them an incentive and the resources to be more profitable over time.

Ryssdal: You can sort of see the bailout making sense for insurance companies and car companies who actually have products that they need to get out into the economy and sell. I'm wondering though about banks, we're going to give them this money, get stock in return. Can we make them spend that money in the credit markets?

Elmendorf: We do want them to lend, that is the ultimate goal of all of this. It's difficult to force them to do lending however, that's the problem. We can encourage it, but we don't want to be in the business of making every individual decision for a bank about who should get money and who shouldn't. I think our best hope now is to inject the capital, give them a stronger base from which they can do more lending.

Ryssdal: Whatever happened to plan A, the plan to buy up all those toxic assets? It seems that sort of got lost in the shuffle of, 'Oh my goodness we have to inject this money into banks directly.'

Elmendorf: Yes, most outside observers thought it was a mistake to focus on buying troubled assets. That it actually made more sense to make equity injections into financial institutions. And I think that as the Treasury thought harder about using the money, they came to the same conclusion. I think that's very good news, I think the money is being better used now. They may still need to go back and buy some troubled assets, but the first problem really is the banks not having enough capital.

Ryssdal: Can this bailout make the recession any shorter? The bailout itself with all the problems in the underlying economy.

Elmendorf: Oh yes, I think the bailout will make a real difference in how long and deep the recession is. I think further action to produce mortgage foreclosures, further action to stimulate the economy through more targeted government spending and lower taxes can all help to make the recession much less severe than otherwise.

Ryssdal: How are we going to know when enough is enough?

Elmendorf: Well, the art of economicforecastingg has not looked any better over the last year, than it has over all the other years. But I think we just need to keep watching. And until we are sure that borrowing is continuing and that spending is continuing, we'll need to keep doing more.

Ryssdal: Douglas Elmendorf, a senior fellow at the Brookings Institution. Mr. Elmendorf thanks a lot for your time.

Elmendorf: Thank you for having me.

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