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The status of the economic recovery, and what’s to come

Marketplace Staff Jun 30, 2011

The status of the economic recovery, and what’s to come

Marketplace Staff Jun 30, 2011

Kai Ryssdal: As we speak, rumors are flying fast and furious back in Washington that there’s a deal coming on the debt ceiling talks. Here’s our own contribution to the reporting.

Jack Lew, the director of the Office of Management and Budget, was supposed to be on the show tomorrow. We’re doing it in front of a live audience at one of Aspen’s finer nightclubs. Got a call this morning, though, that Mr. Lew won’t be able to make it. Says he has to stay in Washington.

So now we have a five-and-a-half minute hole in the broadcast — that’s our problem, not yours — but at least there does seem to be some sanity returning to the politics of the American economy. New York Times columnists David Leonhardt and Joe Nocera write a lot about that — and many other things — so we’ve asked ’em to come by and share their thoughts. Welcome.

David Leonhardt: Thank you.

Joe Nocera: Thanks for having us.

Ryssdal: Ostensibly, David, it’s good news that people in Washington are talking about an agreement on the debt limit and the debt ceiling. But the first thing I thought of when I heard all this talk this morning was a column you had in the paper the other day about us having to deal with the deficit we actually have versus the one we imagine we have. Play that out for me a little bit.

Leonhardt: First of all, it certainly is good news. We need to raise the debt ceiling; it would send a terrible message if we didn’t. But it doesn’t solve our problems. The deficit we imagine is a deficit that’s caused by spineless politicians and by oil subsidies and basically by all sorts of other people. The deficit we have is a deficit that’s caused first by Medicare, second by Social Security, third or maybe second by historically low taxes, and fourth by the military. And so the only way we’re going to get a handle on our deficit is to make changes that are not popular.

Ryssdal: Right. Joe, let me turn to you for a second and the role of the banks in helping to heal this economy, which one assumes is what a debt limit agreement will do. The banks are making most of their money now trading, not actually banking; they are in business, it seems, for themselves. How long can that continue as we try to get this economy back on track?

Nocera: Well the banks have a problem. Trading has been, for quite a while, their basic business. We’re talking about the mega-banks, the too-big-to-fail banks. It’s what they do. Some of that, as Jaime Dimon likes to say, is done on behalf of clients that want, you know, swap deals. A lot of it’s done on behalf of themselves. The problem banks have is that they still have a lot of bad stuff on their books. They are being punished — and some ways, rightfully so — for the excesses of the subprime bubble, i.e. you saw the Bank of America, $8.5 billion deal. There are going to be other deals like that. They have new capital requirements coming down the pipe. They’re actually kind of scared about what would happen if they open the spigot and really start lending in a big way. And I think you’re going to see, when economic recovery really starts to take place, as is so often the case, it starts from the bottom up. It’ll start from the community banks; it is not going to be JPMorgan leading the way out of this.

Ryssdal: We are still, in this country, dealing with this enormous personal debtloads, David. And how do we recover from the bottom up if consumers are still trying to deal with their debt?

Leonhardt: Slowly. I think that’s the first thing we need to keep in mind: that financial crises wreak terrible damage. And the way to avoid that damage is to have more serious regulation and to not have a housing bubble and a Wall Street bubble. But it’s too late for that; that’s not one of our options at this point. So we have to realize that it’s going to take a really long time, and then we have to try to take some smart actions to speed it along a little bit. To me, that’s things like a targeted payroll tax cut — not for everybody, but for businesses that are actually adding workers.

Ryssdal: This is a question, actually, for both of you, and I want to pick up on your mention, Joe, of Jaime Dimon and the issue of bank regulation. Jaime Dimon famously has said, you know what, we don’t need more regulation; if we had regulation in place in other industries, we’d still be dealing with horse and buggies and we’d go backwards. How can we effectively regulate — but not, giving the banks their due, squeeze them too much?

Nocera: First of all, I disagree strongly with what Jaime has been saying. It is not too much for the country to ask the big banks to have higher capital. If they’d had higher capital, we might not have gotten into this problem. It is not too much to ask that the country know what the banks’ derivative exposure is to Greece. Which by the way, three years after the crisis, we don’t know! The regulations that have been put in place will not kill the big banks — they won’t kill the little banks. They’re actually pretty tame.

Ryssdal: David?

Leonhardt: I agree with Joe. We’ve had lots of regulation in this country, it hasn’t kept us from becoming the richest country in the world. I think capital’s incredibly important: it’s a cushion against something bad happening. And on top of more capital, I also think we should have a finance tax — that helps with our deficit and it helps with future financial crises. I don’t mean a tax on every transaction, but I mean a tax that basically acknowledges, look, banks get into crises and let’s make them pay now for the costs we know they’re going to have over the next century.

Ryssdal: So that’s a good point about future financial crises, because there’s going to be another one. Question is, though: how do you make people still care when the most recent financial crisis has not yet resulted in significant reform and change?

Nocera: You know, that is a tough one. On the one hand, I do think there’s still an enormous amount of pent-up anger in the country, but there hasn’t been the trauma that there was in the 1930s. And if you go back and look at the history of the 1930s, you basically find that most of the really powerful regulation like Glass-Steagall and the formation of the SEC stemmed from populist outrage at what had happened. And it does kind of feel to me like we haven’t gotten to that point — maybe we won’t get to that point — where there will be so much more outrage that we’ll pass better regulations, more regulations, we’ll do more of what we need to do.

Ryssdal: David, pick up on that: where is the outrage?

Leonhardt: Part of the explanation is that this crisis never got nearly as bad as the Depression did. Lehman Brothers collapses in September 2008. You have the Fed and the Bush administration being very aggressive immediately. You then have the Obama administration coming four months later and be even more aggressive. And you basically turn something that the economic data shows started as more severe than the Great Depression into something much, much less severe. And that just means we have a lot less outrage, and as a result, it’s much harder to push through fundamental change.

Ryssdal: David Leonhardt and Joe Nocera, columnists for the New York Times. Guys, thanks a lot.

Nocera: Thanks for having us.

Leonhardt: Thanks Kai.

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