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Weekly Wrap: Bailout, cut and scheme

Marketplace Staff Dec 19, 2008

Weekly Wrap: Bailout, cut and scheme

Marketplace Staff Dec 19, 2008


Tess Vigeland: Ordinarily, it would be rather quiet on the news front, but these are not ordinary times. As you heard up top, the White House gave out a last-minute stocking stuffer for the auto industry today. Santa came early at the Fed this week with that big interest rate cut. Oh, and that Bernie Madoff Ponzi story ? that one just keeps on giving. Joining us for the Weekly Wrap on all this and more is Katie Benner from Fortune Magazine.

Katie Benner: Hello.

Vigeland: And David Leonhardt. Glad to have you back.

David Leonhardt: Thank you.

Vigeland: Katie, real quick, just put in context for us ? how big is this Madoff scandal?

Benner: First of all, we don’t actually know how much money he supposedly lost or buried or whatever it is he did with it, but the estimated number is $50 billion. That is the annual revenue of a company the size of Fizer.

Vigeland: Is there any way to estimate the kind of damage something like this can do to the economy at large? Is it that big? Will it have an effect kind of beyond Madoff’s clients?

Benner: It’s interesting because I don’t think we can estimate any damages because we can not yet estimate how much money was actually lost; we have no idea how much money he actually gathered from investors because the amount of assets under management that he filed with the FCC was $17 billion and that’s probably false since at least $35 billion was given to him according to the people who say they’d given him money. We have no idea what he did with it; if we look at today’s news, we see investigators have found trading records, they found no counter-parties for those trades. It’s possible he was never even trading the money, so what was he doing with it? And where is it? It could still exist, or it could not.

Vigeland: But David, you know, just when you think things can’t get worse, something like this happens; it’s awfully scary for people. Is this going to have any more affect, perhaps spur some regulation?

Leonhardt: I think that we really already had the rules on the books to try and prevent a situation like this and what we’ve seen this week with the SEC’s admission that they didn’t do what they should have been doing, is that they were asleep at the switch and so I don’t know that it needs to create any new regulations, but I do think, as is already likely to happen, it is a reason that the atmosphere within regulatory agencies should change and we shouldn’t simply assume that because businesses are doing something that it’s OK.

Vigeland: Well David, you know, another big story this week was the Fed’s interest rate cut going a little lower than most folks expected ? kind of caught a lot of people off guard. What was your reaction?

Leonhardt: Well, people are clearly scared of deflation; they’re scared that we’re going to get into a spiral in which prices start dropping, and it’s hard for them to stop that. And the reason that can happen is that if people start to anticipate that prices are going to start falling then they stop shopping, right; if you know that a piece of furniture is going to be less expensive three months from now than it is today, then you’re going to wait and that waiting weakens the economy further. And the reason that deflation is so scary is that it makes peoples’ debts essentially harder to pay off and so the Fed is really attune to the risks of deflation and that’s, I think, the main reason that the Fed acted so aggressively.

Vigeland: But Katie it doesn’t seem to have really had much effect, at least not on the last couple of days.

Benner: Well I think one of the reasons is psychological, and that’s because of the Fed’s statement, not necessarily because of the size of the rate cut. Having the Fed come out and say we will also be willing to buy liquid assets and we will be able to buy them in large quantities and that we will keep this rate this low for as long as it takes, signaled to people that there is still no trust in the system; there’s so little trust and so little knowledge about how much anything is possibly worth right now, that the Fed may have to step in and make the market itself. Just that idea does not inspire confidence.

Leonhardt: It’s a tricky situation because on the one hand the Fed’s move may not work. If people are really worried about what’s going on in the economy, low interest rates aren’t going to cause them to spend or invest. On the other hand, there always seems to be this moment when the Fed acts, and their actions haven’t taken affect. And people start to get nervous ? oh no, the Fed is just pushing on a string, it is no longer able to do what it used to be able to do. But the fact is we really need to wait in order to know if the Fed’s actions will have an effect.

Vigeland: This whole notion that the Fed comes out and says we will do anything ? you can’t help but wonder, oh wow, we must be in pretty dire straights here.

Benner: It sort of means that nobody else will do anything and that’s the problem.

Vigeland: David and Katie, thank you both for bringing a little context to the news of the week, and happy holidays to you.

Benner: You too. Thank you.

Leonhardt: Thanks a lot.

Vigeland: Katie Benner of Fortune Magazine and David Leonhardt with the New York Times.

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