The markets and the crisis of trust
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TEXT OF INTERVIEW
The thing about a market story like the one we’re in, whether it’s the credit markets we’re talking about, or stock markets, is that it’s pretty easy to tell how all the various fixes are working. The short answer of course is, so far, not so well. We told you about tight short-term credit up at the top of the program and how not much has changed since the big global rate cut yesterday. Equity investors voted with their feet again today, the major indices down 5 percent or more. So we called Andrew Lo, who teaches at MIT the Sloan School of Management to find out — what are investors thinking?
Andrew Lo: Well, you know, part of the problem is that investors aren’t thinking right now, they’re reacting. And they’re reacting emotionally mainly with fear. Unfortunately, although there is never a good time for a crisis, this crisis hit at just about the worst possible time in the sense that we’re in between administrations. So we don’t even know which team is going to be leading the effort to rescue the economy in January. And fear of the unknown is probably the strongest kind of fear there is, and that’s exactly what’s going on throughout the world right now.
Ryssdal: But the government is trying so hard. It’s pumping cash in. It’s cutting rates. The Treasury secretary has these new powers. I mean, what’s unknown about what the government is trying to do?
Lo: You know, there is still a lot though that is unknown, for example, this rescue package and the number that’s been bandied about — $700 billion. That’s a very scary amount of money that we’re talking about, and I think that a number of Americans don’t really understand exactly where that money is going to go and actually where it is going to come from. You know, if we look at the numbers from a bigger perspective, $700 billion is actually quite manageable, because, at the end of 2007, U.S. household net worth was about $53 trillion. So, we’re talking about maybe 1.5 percent, at most, of our household net worth. But nevertheless the number sounds scary. I think that the government’s actions are quite laudable but we really need to have some kind of leadership to understand exactly what’s going on.
Ryssdal: You know there is a school of thought that goes, look, we’ve got an expert on the Great Depression Ben Bernanke running the Fed. We’ve got a guy who knows Wall Street running the Treasury Department — what’s the disconnect? Is that not translating to the everyday investor?
Lo: Well, there is no doubt that these two individuals are extraordinarily well qualified for dealing with the situation that we’re in. So, I think you would be hard pressed to find two individuals that you would rather have in those roles, but they don’t necessarily inspire the kind of public confidence that I think we’re looking for. We really need to have a spokesperson that can inspire that kind of confidence. You know, going back to people like Ronald Reagan or Bill Clinton or Warren Buffett for that matter. That’s the kind of leadership that I think the public is looking for at this point.
Ryssdal: Let me get you to the news of the day that Secretary Paulson is considering direct equity investment in some of these banks. Has his strategy changed course from buying up bad assets to buying stock in banks because investors and the markets are so uneasy?
Lo: Well that may be part of it, but I think another part may be that in looking over the various, different opportunities, he has been able to identify some significant opportunities for taxpayers .There’s a very big difference between taking an equity position in a company that’s troubled, but that could pull out of it, and then the equity could be quite valuable. Versus simply buying up the bad assets. You know a short-term fix is to buy these troubled assets and just take them off the books of these companies, but that’s not a long-term fix. A long-term fix may well be to take a piece of the equity and help the company get back on its feet.
Ryssdal: Doesn’t exactly inspire confidence in a market looking for confidence though, when the guy in charge sort of does a 180 on his strategy.
Lo: Well that’s exactly right. i think that’s one of the reasons you see these markets being as choppy as they are, and this is the kind of leadership that I was referring to. We do need to have somebody at the top that can express a degree of confidence and even optimism that we are going to get out of this and that we will have the wherewithal to deal with all of these issues.
Ryssdal: Andrew Lo is a professor of finance at the Sloan School of Management at MIT. Professor Lo thanks a lot of your time.
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