Fallout: The Financial Crisis

Weekly Wrap: What have we learned?

Marketplace Staff Jul 2, 2009
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Fallout: The Financial Crisis

Weekly Wrap: What have we learned?

Marketplace Staff Jul 2, 2009
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TEXT OF STORY

Kai Ryssdal: On the theory that most of you are going to spend the next three days paying less attention to the news than you usually do, we thought we’d send you into your long weekend fully informed about the state of business and the economy halfway through 2009. And so we bring you our Weekly Wrap of Wall Street and beyond. Business writer Heidi Moore joins us, as does Felix Salmon from Reuters. Welcome back everybody.


HEIDI MOORE: Hi Kai.

FELIX SALMON: Hi Kai.

RYSSDAL: All right, gotta get your take on the jobs numbers first of all. We touched on it really briefly up at the top of the broadcast. Felix, what do you think?

SALMON: Really bad, the number of long-term unemployed as the percentage of the unemployed is the highest it has been since 1948.

MOORE: You know it’s bad when people claim as a victory that it was 9.5% instead of 9.6%. So it’s bad, and it does indicate that the economy is broken.

RYSSDAL: All right, well hold everything for a second. Because if you look at the job support today, if you look at the fact that foreclosures are still rising, housing industry is still arguably broken. How can it be that banks are feeling what seems to be pretty good about themselves, Heidi?

MOORE: A high degree of delusion actually, which has worked very much to their favor. And I think that there are issues right now with toxic assets and so on, still are very much at the top of their minds, still will drag down profits, eventually. But what is working for them is that some of the capital markets are coming back. They can trade stocks and bonds, they’re doing a few deals here and there, but no one should mistake it for a long-term, healthy verdict on their future.

RYSSDAL: All right, Felix, I want to pick up on that thing she said on toxic assets, because six months ago it was all toxic assets. And now all of the sudden the banks can raise capital in the markets, they’re reporting profits. And yet there are these bad assets still on the books that, correct me if I’m wrong, that everybody has seemed to forgotten about.

SALMON: Not completely forgotten, but largely forgotten. There was this bright idea, you might remember it, it was called the PPIP. And the idea was that banks would all start buying each other’s assets of each other with lots of government bank stops, and guarantees and things like that…

RYSSDAL: This was the Treasury Department’s plan, this was Timothy Geithner’s plan.

SALMON: And that would make everything better again. But the point was that the banks were really happy about the PPIP because everybody got so excited about the PPIP that the stock prices of the banks went up enough that the banks could issue new stock, and recapitalize themselves. And now they’re all going around and saying, hey, guess what? We’re recapitalized and so we don’t need the PPIP anymore, because we have all this extra capital. What they’re not saying is that the amount of extra capital they raised is one day’s worth of write downs if they actually bothered to mark their assets to what they’re actually worth.

RYSSDAL: All right, well, Heidi do me a favor and bring the consumer into this. Because consumers six, eight, nine months ago were terrified. Right? We were being told the whole economy was going to go under because of these bad assets. We have now worked our way through that. We have come up with some solutions. There’s been a stimulus plan, there’s been the bailout. And yet the toxic assets, the thing at the root of this entire mess, are still out there. What is a consumer to think?

MOORE: Well, the important thing is that we have learned nothing.

RYSSDAL: You guys are killing me today.

MOORE: And that will continue to be the lesson for as long as humanity roams the earth. It is true, we haven’t learned very much. Consumers need to believe in banks, banks need to believe in consumers. This is sort of a recovery that will not happen from one side or another. Right, so, consumers need to act more responsibly, and save more money, which it seems like they are doing. The savings rate is high. But banks also need to act more responsibly. And in one particular case you’re not seeing that necessarily, which is that in June banks actually started buying and holding more mortgage-backed securities.

RYSSDAL: We talked about this on the broadcast yesterday. Amy Scott had a piece on it, on the show. But make us understand why this matters.

MOORE: Well, it matters because that banker in a suit that you thought had gone back to his normal self and is boring is pretty much in his mind still on spring break in Cancun. And he’s acting a little bit recklessly. He’s not making a big deal about it. But those subprime mortgages are risky, and the risk is by no means gone from them.

RYSSDAL: So, Felix, we really have learned nothing.

SALMON: It certainly looks that way. The banks are using absolutely any means at their disposal to try to get themselves out from under the yoke of government regulation, when what we really need is lots of government regulation. But the banks are going to be the last people to admit that, and it’s going to happen over their screaming objections.

RYSSDAL: Felix Salmon blogs for Reuters. Heidi Moore write on business and a whole bunch of other stuff. Thanks you guys.

MOORE: Thank you, Kai.

SALMON: Cheers, Kai.

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