Thursday, October 2, 2008

From the Lou Dobbs News

The following are comments from significant economists about our future:

Joining me now are Joseph Stiglitz, he's professor of economics at Columbia University, winner of the Nobel Prize for economics, the co-author of "The $3 Trillion War," out in paperback today by the way. And Paul Muolo, he's executive editor of National Mortgage News and the author of "Chain of Blame, How Wall Street Caused The Mortgage And Credit Crisis." And Professor Peter Morici, he's professor at the Robert H. Smith School of Business at the University of Maryland. Thank you all for being here.

Let me turn to you first, Professor Stiglitz. This is, obviously, a nightmare that we're going through on Wall Street. But that nightmare extends across the country. When, in your judgment, will we see the Wall Street component of this at least stabilize and the bankruptcies and the desperate need for capital infusions end?

PROF. JOSEPH STIGLITZ, COLUMBIA UNIVERSITY: I think it's going to go on for a considerable length of time. There's a dynamic in place and it takes a while. You know, people have said there's a light at the end of the tunnel, but what really is going on, it's a light of a freight train coming at us. And what is going on is the house prices are falling, more bankruptcies, more defaults, more foreclosures.

DOBBS: Are you talking about Wall Street foreclosures?

STIGLITZ: House foreclosures, but those are many of the assets wall street firms have. So when those foreclosures occur, that weakens the asset base or the balance sheet of the banks. And so you have accumulative process going on.

DOBBS: Professor Morici, are you at least encouraged that Secretary Paulson decided not, and presumably the president and Fed Chief Bernanke, decided not to put anymore taxpayer capital and backed capital forward in the case of Lehman Brothers and ostensibly at this point, AIG?

PROF. PETER MORICI, UNIVERSITY OF MARYLAND: Absolutely. Since December, they've been putting taxpayer money in the discount window, getting good U.S. treasury securities and dollars in exchange. The whole idea was these were commercial banks and they were vital to the economy. But our reward was these bankers stopped doing commercial banking.

So credit has been drying up around the country. When Lehman Brothers dissolved yesterday, we didn't have a commercial bank dissolve. We had something quite different. It was the old merchant bank and the securities firm and so forth going forward. We need to have more bankruptcies so they get away from the business model causing them to abandon conventional banking, make sound loans and do the right thing.

DOBBS: When you say bankruptcies, Professor, you're referring to bankruptcies on Wall Street whether it be investment banks or whether it be in commercial banks?

MORICI: Absolutely. We need the exit of more Lehman Brothers and hopefully some of the regional banks which are better run will percolate up, they'll expand and take their place and start to do the right things for American capitalism and get the economy going again by getting credit rolling again. But it's going to take some time, as Joe said, because it takes time to shutter these places.

DOBBS: Shattering these places, and we were seeing first the subprime mortgage meltdown. Now we're seeing those credits that are of far higher standing being affected.

Paul Muolo, this mortgage crisis, this housing crisis is going on and seemingly going on unabated as house prices continue to fall, foreclosures continue at a historical rate.

PAUL MUOLO, EXEC. ED., NATL. MORTGAGE NEWS: Indeed. I mean, I don't know when this is going to end. What the government is trying to do, they keep praying they're -- they keep making these moves to calm the markets, calm consumers that they're in charge. That eventually they're trying to get consumers to buy houses again. But when unemployment keeps going out, why could a consumer buy a house? It's a very bad situation and a lot more pain to go through. It could take up to ten years.

DOBBS: Ten years to recover in housing?

MUOLO: Up to ten years. That's worst case scenario. That was a year ago we wrote that. It's bad. This is going to trickle down to the working guys you mentioned earlier. There's a lot of people employed indirectly through wall street, janitors, cops, there's a lot of blue collar jobs that will go away.

DOBBS: If I have to take my pick, I'll side up with the working man and woman, because the middle class is the foundation of what we do, not Lehman Brothers, not Merrill Lynch, and not AIG.

MUOLO: Right.

DOBBS: Let me turn to you and ask you this. Why, and I raised this issues a year ago, why have we not been able to see this government respond to where the crisis is? And that is in those homes where foreclosures taking place? Why are we watching the same idiotic free trade policies that put them in competition with the cheapest labor in the world, why are we not watching some bailout, if there's going to be one, for people who work in this country?

STIGLITZ: I agree. The problem should have begun at the base, which is the foreclosure of homes. And we should have made it more affordable. The interesting thing is we gave a big tax deduction to wealthy Americans in some states effectively 50 percent of interest and real estate taxes paid by the federal government. But poor people, the subprime mortgage people, get nothing. And if we reform that, that would at least provide a basis of more people staying in their homes.

DOBBS: But, again, you have an issue you how much income can be set aside through a tax exemption of some sort.

STIGLITZ: But we redirected some of that money that's going to upper income people and put it to ordinary Americans, it would make a big difference and make more homes affordable.

DOBBS: But where are these two presidential candidates on this, Professor Morici?

MORICI: Well, they're no place is where they're at. Neither has a plan to clean up wall street and what they offer to shore up the working men and women won't solve the fundamental problems. The most significant thing they can do is to do something about, I know it's off the subject, but better jobs to afford the houses. But in the meantime, what they've got to do is get these New York banks securitizing loans again. There's little conventional money out there. That's why it's all on the back of Fannie Mae and Freddie Mac.

DOBBS: Paul Muolo, last word here.

MUOLO: Wall Street is not going to go back to securitizing anything that's not a prime loan. Fannie Mae and Freddie Mac are the only game in town. You got bad credit, you're not buying a house. Those days are over. Cash is king.

DOBBS: Paul Muolo, thank you very much; Professor Morici, thank you very much; Professor Stiglitz, thank you.

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