Daniel Gross takes readers' questions about the financial crisis, nationalization, and his new book, Dumb Money.
Slate's "Moneybox" columnist, Daniel Gross, was online Friday, Feb. 27, to discuss his new book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation. An unedited transcript of the chat follows.
Daniel Gross: Greetings—and thanks for coming. I'm Dan Gross, "Money Culture" columnist at Newsweek and "Moneybox" columnist for Slate. I've just come out with a new electronic book: Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation (Free Press). For now, it's available only on the Kindle, Sony Readers, on the iPhone, or as an audio book. Readers interested in seeing a PDF of the first chapter and/or learning more about a paper version can send an e-mail to: email@example.com.
I'm eager to answer your questions.
Los Angeles: If Washington is afraid to nationalize Citibank (and other banks), why don't they act as a clearing house and send us shares of Citibank stock when we submit our taxes to the IRS?
Daniel Gross: Hi LA—that's an interesting thought, and not entirely without precedent. In Russia and in former Soviet bloc countries, when they privatized government-owned companies, they sent vouchers, basically books of coupons that were shares in the companies, which people could then trade. Before we get around to privatizing Citi, we'd have first to nationalize. And so far, we're basically getting half measures. The news today, in which the gov't is converting shares of preferred stock into common stock, will bring the government's holding (i.e. yours and mine) up to 36 percent.
Laurel, Md.: Mr. Gross, you were here a couple of years ago promoting your last book about bubbles being good for the economy, pointing out that past bubbles left us lots of fiber-optic cable and railroad mileage, despite offering their investors overall poor return.
So, can we make the housing bubble into a positive?
In my opinion we can and should—lack of affordable housing was major problem in many metro areas a few years ago; so if we sub-divide those McMansions we can provide housing for lots of people ... if local residents will accept that.
Since local voters and homeowners are the same people, are they going to see the economic morality of moving several families into what had been built as a large home for one?
washingtonpost.com: Slate: "Why Economic Bubbles Are Good"(washingtonpost.com, May 10, 2007)
Daniel Gross: Hi Laurel—there's no question that lots of the housing built can find new uses. But I think the situation today is going to be more analogous to the 1920s stock and credit bubble than to the internet and telegraph—in terms of what gets left behind. The utility of bubbles is when they leave behind a new commercial or consumer infrastructure that other people can use to create new businesses.
Housing and mortgage debt won't leave much of that sort of stuff behind (although the refinancing mechanisms and websites like Zillow and Domania are useful and will remain). But here's the thing. The 1920s didn't produce any useful infrastructure. But the response to the bubble did. We got an entirely new financial architecture in the early 1930s: the SEC, deposit insurance, fannie mae, the investment company act. And this proved to be the basis on which the post-war credit-enabled economy boomed.
In the last few years, that infrastructure (like physical infrastructure from the 1930s) has been crumbling. We clearly need—and will get—a different global financial architecture in response to this bubble.
Newark, N.J.: Will bank nationalization allow other governmental agencies to have access to my financial records?
Daniel Gross: I would guess not, thought it's not my area of expertise. But it's my understanding that if, say, the FBI wants your financial records from a private bank, there are avenues through which they can do that.
Fair Lawn, N.J.: In one of his many articles on the subject of bank nationalization, Nouriel Roubini (who strongly supports nationalization) suggests that nationalization is inevitable. He theorizes that the one reason the government has not done it yet is because the effect on the remaining un-nationalized banks would be extremely harmful and that they are waiting for more banks to require nationalization before actually doing so. What is your take on his point of view? Do you feel that the banking industry has somehow stood in the way of nationalization through Lobbying
Daniel Gross: Nouriel Roubini has been one of the smartest and most prescient observers of the financial scene, and I generally agree with his take. In some instances, I do think that nationalization, or some form of it, is inevitable.
I'm not sure that nationalization would be harmful to those that aren't nationalized. There's a real stimga to nationalization. Executives wants to avoid it. Government involvement forces you to shrink operations, to change business practices, etc. I think if banks are nationalized they'll be focused more on cleaning up their mess rather than expanding and taking market share. For banks, the best situation to be in today is not needing any government help at all. Those are the ones whose stocks have performed well, who are gaining market share.
As for the banking industry and lobbying, I think they're sort of divided and confused. To a degree, they haven't come to grips with how the situation has changed. They seem to want unlimited taxpayer help with no strings attached, which is simply a non-starter.
Buenos Aires, Argentina: Dear Mr. Gross,
What we are witnessing in the U.S. seems familiar in countries such as Argentina in terms of the severity of the economic an financial crisis leaving aside that the U.S. dollar is the reserve currency of the world. In countries like Argentina, default and debt restructuring were the tools to try to restore growth. How the U.S. will be able to resume sustained growth with a $5.3 trillion debt pressing the economy down? Is it possible to monetize that kind of debt gradually?
Daniel Gross: Good questions. Resuming sustained growth is going to be a challenge. Given the fiscal situation, and the state of balance sheets, it can't be propelled by credit and debt as it was in 2001-2003. We have to rely on the continuing story of globalization—trade, exports. And we also have to rely on innovation. A third thing that could contribute to growth would be an economy-wide effort to become more efficient, to do more with less. That would have the effect of improving our profitability even if growth isn't that high, and would free up more cash for debt repayment.
The good news is that the U.S. does have the ability to borrow big chunks of money for the long term—10 to 30 years.
Boston: Hi Dan: I enjoy your column regularly and I am looking forward to reading your new book. My question relates to the Stimulus Bill. President Obama and all his supporters cited Japan's lost decade in explaining why we needed to hurry up and spend a trillion dollars. This past weekend I read in the NYT about Japanese citizens who lived through this "lost decade." They didn't describe mass chaos or long breadlines. They mentioned that they had to eat cabbage once or twice a week and fewer 22-year-olds were buying cars. In other words, they lowered their standard of living a small amount to adjust to a slightly shrinking economy. To avoid this fate, we in the United States are going to spend ourselves into oblivion. Do you think the cure could be worse than the illness? Thanks and keep up the great work.
washingtonpost.com: " Lessons From Japan in Stemming a Crisis" (New York Times, Feb. 13)
Daniel Gross is "Moneybox" columnist for Slate, business columnist for Newsweek, and the author, most recently, of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation.