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Slate columnist Daniel Gross and Big Money staff writer Chadwick Matlin were online at Washingtonpost.com to chat with readers about the governments financial bailout plan: paying for it, avoiding its pitfalls, and figuring out who's holding it up. An unedited transcript of the chat follows.
Chadwick Matlin: Hi everybody, Daniel Gross of Slate and Chadwick Matlin of The Big Money here. We've got $700,000,000,000 worth of stuff to talk about. Let's get to it.
Denver: Why aren't Paulson and Bernanke (might as well throw Cox in there too) going before Congress to tender their resignations instead of asking for more money to fix a problem that only exists because of their lack of oversight? After all, they have at the least watched all of this happen and done nothing, and it appears to me they actively have participated in the process that has brought us to the brink.
Daniel Gross: No question they did watch some of this happen, and oversight could have been better. Don't think it's fair to blame Bernanke and Paulson. This fire was set a long time ago, and I actually think that the issue of regulation here has been overemphasized. This is something Wall Street did to itself in large measure, with the encouragement of consumers and investors.
Raleigh, N.C.: I just want an apology from the banks for being greedy, and I want some kind of concession. The one thing that resonated with Bush's speech last night was his remark about ordinary Americans who are making their mortgage payments on time. That's me. I just feel like we're headed toward another "trust us, we know what's best" scenario, just like Iraq.
Daniel Gross: I agree with you that the performance by executives has been shameful—total cowardice in not coming public, admitting their errors, and asking how they can personally contribute to solving the problem.
Egg Harbor Township, N.J.: I know that selected investment institutions have gone under and that there are stories of how credit has become more expensive. However, are there objective data that describe how this is a generalized condition that threatens our economy? For example, what percent of bank reserves are represented by shaky mortgages?
Daniel Gross: There's lots of data out there, mostly available on a bank by bank basis. Each quarter, they say what percentage of their loans are delinquent, or aren't performing. And of course that can change dramatically from quarter to quarter. A $300 million construction loan that was in fine shape last quarter can suddenly go bad. That's why the aggregate data on those can be misleading. They're backward looking, and what makes this so scary is that things seem to be deteriorating in real time.
Princeton, N.J.: Is the promise of the bailout a signal to banks to freeze/reduce credit until they receive funds for low-value mortgages?
Daniel Gross: No. I think it's primarily a signal to investors in these banks, and to depositors in them—and to all sorts of people who do business with them—that they shouldn't withdraw their funds, that they should stick around, because the cavalry is coming.
Los Angeles: Is it possible the economy can right itself without the bailout? How can we be certain that there won't be another economic calamity around the corner, even with the proposed bailout?
Chadwick Matlin: An important point that sometimes gets glossed over: The bailout is for the banking industry, not necessarily the entire economy. Unemployment still sinks, housing starts are buried under months worth of depression, and the fundamentals of the economy almost certainly are not sound. Passing a bailout should-and I want to emphasize should-do something to change that by allowing banks to feel comfortable about lending out new credit. But the reality is that nobody actually knows for sure that the bailout will help, not even Paulson.
Most people are certain, though, that not passing the bailout would be suffocating. Without any credit, it's hard for folks to buy/build new homes, corporations to fund new money-making projects, and the economy to grow. Credit is the grease that helps the engines run. Without it, we're probably stuck in a very low gear.
Ellicott City, Md.: I have a small amount of money in Bank of America stock. In the past few weeks, the volatility has been amazing. It's been up 10 percent one day, then down 10 percent the next—over and over again. Who are these people who are rushing in to buy and then rushing to sell so much? I assume it must be institutional investors that can move the stock so much. Why not sit back and see what happens?
Daniel Gross: Ellicott City—yes, it is institutional investors. More than ever before, the markets today are dominated by professional institutions, as opposed to individuals like you and me. And there are so many professional traders with different motivations (some short, some long, some quantitative, some fundamental) that it's not surprising stocks ping around in a time of uncertainty. In addition, a lot of these investors have their own issues—they may be concerned their investors will want to get their money back, so they sell positions suddenly to raise cash.
Arlington, Va.: The argument the Bush administration gave about not including a cap on executive compensation seems completely phony. The stockholders and board of directors would rather go bankrupt than accept help from the government with strings attached to their CEOs' salaries? Isn't this just the old boys network looking out for one another?
Daniel Gross: Yes.
This has been another in the long-running series of simple answers to smart questions.
New York: It's been suggested that, once the government took ownership of these worthless mortgage-backed securities, it could renegotiate mortgage payments with borrowers to avoid foreclosures. That would help borrowers stay in their homes, and eventually drive up the securities' values so they could be sold and some money recouped by the taxpayers. Is this actually part of the proposal? If so, could it realistically happen? Thanks.
Daniel Gross: That has been part of the proposal. I'm not sure if it's actually in there now. Remember, the original was just a very brief sketch by Paulson, basically the length of a good blog post. And I think part of the theory here is that the federal government can be more patient than other types of investors, and as a result would have more leeway in terms of renegotiating or freezing mortgages.
Mountain View, Calif.: Paulson and Bernanke claimed that without a bailout plan, the outcome would be worse. A typical phrase used is "the U.S. financial system would melt down." Everybody seems to agree with this assertion, with no questions asked. Can you clarify what it means, and can you describe the worst-case scenario with no bailout? And most importantly, how certain are you in that prediction? I can't help but remembering the "mushroom cloud" sales pitch for the necessity of the Iraq war.
Daniel Gross: That's a tough question. I had generally taken the view that this week things had settled down. And the risk of a meltdown seems more remote. After all, there aren't that many big institutions left that can fail. But I know from speaking with them that the policymakers feel otherwise. They're intently focused on some pretty obscure data points—the interest rates banks charge one another, etc. And most of those still show a high level of distrust and fear.
The ultimate fear is that banks and companies simply will stop extending credit to one another, and credit is the grease that makes the global economic machinery work
Laurel, Md.: We know that in some ways the '90s tech bubble distorted the economy, like laying too much optic cable. How much did the housing bubble distort the economy by encouraging too much housing? I live in a townhouse well-suited to a single person—about 1,200 square feet, convenient to the highway and my town's parks and shopping. It would sell for $250,000. A mile down the road, a former horse pasture has been replaced by $800,000 mansions with a ten-foot strips of grass between them.
Chadwick Matlin: Trying to assign blame in this mess is difficult because it was such a chain-reaction affair. But, yes, the housing boom certainly seems to have gotten in on the action in the early going, and has provided plenty of villains. Because housing prices were rising steadily, mortgage-lenders and mortgage-takers assumed that the price of a house on the market would also go up. That led lenders to give mortgages to folks that couldn't pay for them, and when the housing bubble burst, it made the folks who couldn't pay for them not pay for them. I can only presume that the $800,000 mansion down the road isn't worth quite that much right now.