The Economy

[0:00]" Professor maniac and a starred in the issue of the day which is the economy. We're gonna incorporate you into the issue from a historical perspective but I have to ask our our economic expert to start off. The broadest questionable and that is professor Peterson we clearly are in some trouble here. How bad is the economy number one and what economic model does 2008. Most seem most similar to you when your mind."

[0:32]" recession that's clear and it's getting worse and it's if the bailout is to step number one if we don't do anything else this could be the worst one since the Great Depression I think and it certainly is -- 1982. And its. The consumer spending has dropped like Iraq and all these people who are. Depending upon the value of their houses going up the stocks going up stop spending. People who never accumulate any wealth. Kept our. The -- calculus out of the Central Bank. That cut interest rates that keep cutting. But what's happened to us that we beat the credit spread has just increased. And though. In a boom. Everything looks -- Now everybody's scared. So even though banks find credit it's cheap to them. The credit to customers loans are not -- I mean credits just not available so. If we don't do anything else -- serious stroke."

[1:34]" So if I've been in congress I would have voted against the bill and I would've -- joined. Steve lynch -- bill hunt John Tierney through members of the delegation here voted against the bailout seemed as if there are a lot of Liberal Democrats and also some very conservative Republicans Bunning of Kentucky Shelby of Alabama who also voted against the bail out. Convince me why should have voted for the bill because it sounds to me like you think that was a good first."

[2:01]" Well right. I think you're I think we needed to bail out. I had some reservations about a two down but because I didn't think we should overpay for any assets. I think Europeans -- more nearly right in terms of how they would inject capital into the banking system. But the -- credit system is completely frozen. And it would have gotten much much much worse."

[2:24]" But since since the bail out the market is down what 1500 points at least maybe more. Mr. since the bailout from the on this thing -- remember that the -- the -- was sighed and markets started the tank and I kept thinking through most of the month of of October we are relatively good day today we picked upset 30250. Points off with a thousand point loss earlier in the week. Certainly. Whatever it was intended to do it hasn't really taken effectiveness of."

[2:55]" Credit spreads are easing a bit to mean that Libor the London Interbank lending rate this is. Come down a bit to explain with credit spread means if you could or that you would I know you capture. And that. Yet the the Central Bank to set the rate very very low it's 1% now -- the so called federal funds rate where thanks are for each other and where the federal land. Two banks essentially. But the even banks who aren't from each other we're finding that they they had to pay much much higher rate because no one was -- they get repaid. And what what customers are paying -- from banks. That's the same as it was a year ago or even higher hasn't come down at all."

[3:39]" Five. Six exercise censure and so that's the spread between what the customers are paying yes and what the banks are getting the money for yes so in theory the banks are -- But lending them money to make -- 4% 5% maybe. Yes if there surely get -- okay but others cared which had to spread normally be in healthy economy."

[4:01]" Well the spread you know the the spread between the federal funds rate the primary it was usually about 3% enough to cover costs you know one. You know you have to investigate the credit you have to collect the payments so warm. And that's for prime loans and you know notes more than that and and then anything less than prime it's almost impossible to get credit now."

[5:53]" I also think that not not to quote Sarah Palin but it would have been you have tricky thing to do and this is the guy -- portrayed himself as the mavericks so. Now I have the economist here who's telling me. It was necessary and has almost like the gun was to their head they had to do something and you're saying. They probably. My hit acted in too much case. That he."

[6:15]" Yeah I mean I think it might well have been that the right thing but we were taking the secretary of the Treasury's word and the head of the Federal Reserve and we don't we didn't have a good explanation for and that does concerns."

[6:26]" Well again I know the professor Peter is going to give us an explanation what it. You know do you understand the argument he's making that this thing was really done with a -- that there isn't sure what but the system was unraveling -- thanks for fallen apart from me. You know. T get how to -- from from an economist when did you how did -- get to that point normally. When you're going off a cliff. You know at some point you realize the brakes are failing here I'm going downhill how did they -- I mean September 1 we worried about the price of gasoline. There was no focus for that I heard anyone racing how to we get to that crisis so."

[7:04]" Quickly. It went at it when it falls apart it can fall apart and her yet I mean they're mr. Two things you have to understand it first as leverage using borrowed money in their lever at 32 on some of them. And I -- fire and -- everything's going well you can. Borrowed 4% urine 5% you're an extra point and a borrowed money if that's up thirty to one that's an extra. Thirty on your own investment so making huge amounts of money. And the second is the housing -- people believe housing prices won't fall that they never fall the carrot and a and you know so long as housing prices kept going up at all worked. But when housing prices finally stopped going up as they had to because asset bubbles herself reverse it says how do. Start coming down -- fell apart because. In the sub prime mortgages didn't look very good. Then some of these -- firms found the couldn't renew their loans. They had to start selling assets. Banks aren't they had to start selling. That is everybody selling into a market from Pernod would line."

[8:16]" I didn't know when and if he Obama did bush certainly didn't talk about it McCain didn't talk about it on the did talk about it. I didn't hear wrangle -- or you know the the chairman of the house which means we heard no one issuing that was who. There was no Paul Revere here it's just hit us like I've heard someone refer to it it's as a tsunami. It was tsunami that it was known there was no audience notes."

[8:41]" Nor was there with the dotcom. Boom and then you go back to the 1920s. With the stock market -- what stock market had at some point -- to reach it's peak and then start to decline. But. There was no warning for that people to slew of them get in in certain periods again to a kind of dream moral --"

[9:00]" We told that all of these it's these safety valves these safety -- replace we now have FDIC insurance. You know there's regulation on line of those political question how good the regulation was. Then we've we've sort of relate to believe that."

[9:15]" 1939. And again and well I mean and I would just say that it it's important point out this is not 1929. And one of the reasons that we may be. Sort of exaggerating or going into a panic is talking about this being the worst crisis since 1929. We do have safeguards built into the system and so I think we're far. Cry from from the conditions that existed in this so what is what is this most analogous to your mind what hero well I think you know I think goal of going back it's possible the early ninety's that when Larry -- But when Bill Clinton took office but the the unemployment rate was approaching. He percent at six point five today it was pretty he would you know the economy stupid. But more likely. The early 1980s was wasn't the most severe. Recession since the Great Depression. So I think it's more I think -- early ninety's so far eighties. The savings and loan crisis I think those are more really. Comparable. And I think again the talk so much about the Great Depression. He is too. Maybe to exaggerate in the cause a kind of a panic situation I mean even. Even Obama today and is in otherwise to terrific -- news conference that thought and reassuring. Said there is so little bit of an urgency saying this is the greatest crisis and -- him in a generation. And Tom you know depends on when your born."

[13:05]" We need a huge program to stimulate spending because all the sectors are contracting. At first we should fix the roads and bridges that has been done anywhere admittedly it's going to take some time to get that started we'd get them on the right. But we get the money we spend -- we -- And you say what that increase the deficit. And the deficits going way up if we have a serious recession. We can mitigate it. And have a short recession. That it deficit won't be any worse. It's a free -- it's as close as an economist ever comes to a free lunch. Keynesian freelance keynesian free lunch yes in a recession."

[14:14]" Sure well. -- when told yes in theory."

[14:17]" said that sometimes you can get stuck in a depression. Is so it's sort of like this. -- to work. Nobody's -- Why not nobody buying. And why not nobody has any money or not nobody's working why not nobody -- and doing our job you're stuck you're stuck. And and he even if you cut interest rates very low it's not going to be enough to get you. Then the only answers government spending or big tax cuts but the only answers fiscal policies the only way you're gonna get out. And if in fact you're in a deep depression or even a serious recession. That kind of spending put people back to work as people get back to work and start spending and private business finally comes to the rescue again and start spending."

[15:03]" Couple weeks -- Barney Frank was sitting in the chair you're sitting in tonight and talked about the need for an extra stimulus package. And I was somewhat skeptical and said -- we just had a -- stimulus package in March and April and everybody got this 600 dollar check in the mail whenever and what good does that do. You're talking about something bigger --"

[15:19]" I don't went on yet we may need some of it -- because the couldn't take awhile to get public courts going but but I don't want to give checks to people who have their jobs sure. I'd expand unemployment insurance but to you know. I didn't get a check the last time of course I wouldn't get -- so wouldn't it want to Karen but I that if you want to know I don't know what lies on my children I think my son going to check we Bobby uses for bush because it. If people are smart they'll realize they might as well they should save it anyway because. Some Smith that was the criticism you know at some point we're gonna to pay it back but."

[16:19]" sure and I do some of that I would I would send some money to the states. Because there there are cutting back and we don't need that kind of cutting back at this point I mean. I would hope much of it would be geared toward funding federal mandates I mean what the federal government mandates they should pay for. But you know so -- would give some relief to the states particularly to the unemployment compensation funds but he talked about today but but some beyond that. Sure but I am not sure -- try to stimulate consumer spending all that much because that I think that it's it's good that consumers finally start to cut back and say that the."

[16:53]" More and expand though because I habitable and -- to believe that as well. I -- as a parent every Christmas and -- bigger every holiday I celebrate Christmas -- celebrate other holidays -- around the end of -- that has to be bigger and bigger and better than last year a lot of pressure to me Thanksgiving is the greatest holiday of the year because it's about family and friends and and a good -- and nothing more and then all of a -- I'm -- Christmas music I'm seeing you know Santa -- up on the shelves. Oh -- you don't tears I mean maybe they'll be some clerks who won't get their part time jobs at Macy's and I feel badly about that but I think will be a better society if we spend less in my nuts."

[17:36]" Dorian -- at all I mean we agree on this one and not consumer spending in last year with 70% of our -- 70% of GDP. You know in 1963 it was 62% in 95 it was 67% not 70%. Driven to a large extent by the huge dries in the stock market and housing prices and -- your your assets are going up faster -- your income vice say. But it -- last was it was based on an illusion of wealth and so we're going to make a serious adjustment backward in terms of consumer spending we're gonna become a nation of savers again I hope. But it's going to be painful mean we've expanded retail was expanded dramatically. Far more small some we need."

[18:22]" All over the place any time and as my executive producer regrets economical -- villiers it's try to get into the social Wallace said he. He said he couldn't find a parking space and I had that same experience you go to the walls and -- turtles seem to be full maybe no one's buying but the the there."

[18:37]" But now people see that character rich through Starks a character trip to housing you'll do -- to say and they are going to be say anymore. But some of that somehow that we have to pick up the slack to avoid a deep depression to avoid deep recession."

[19:06]" Well one thing we're not in as serious a situation as we were in the 1930s but one legacy. Of the 1930s I think that that could be a model. Would be the investment the stimulus package in the 1930s. Was in the infrastructure W has an -- he would WPA was preaches. It was. Airports it was hospitals. It was schools can now we could rebuild our rail system and are rare -- system if we were to put the money in there rather than just been consumer spending."

[19:38]" Know what the economist just said here. Going to borrow the money."

[19:42]" Well there's -- there's another have to keynesian economics. I'm not an economist but. And that is when when times are tough the government does a necessity have to spend but then when conditions improve. Then you're supposed to cut. Back on the deficit we learn the first part of that really well but we haven't learned. -- cut back well enough so one thing that does concern me I think in the early in the in the last eight years or so when we. Could have been saving some money we we squandered. The surplus that we had at the end of that at the end of the 1990s."

[20:22]" you know I know that the Clinton. The Clinton needs to say Bill Clinton worked wonders ended up to the surplus balance budgets in all of this. My argument is that Bill Clinton. Had them the benefit of the the collapse of the Soviet empire and the dot com revolution that just poured money into into the government how wrong in my -- that."

[20:43]" Hi there your mostly right except he also asked for sacrifices he ran in 1992. Pledging a -- should sound familiar a tax cut for the middle class. And then some -- tax increases on upper income groups in in the stimulus package he ended up having to raise taxes on the middle class. Including energy taxes. But that was so that was a hard choice he made and as a result the economy did very well the rest of the 1990s and one of the things that concern me about this campaign. Was that Tom there was really no indication. Me aren't given the public that there is going to have to be some sacrifice that's going to have to go along. With some with there in the next ten years."

[21:34]" first this hour on nights that are -- Great great thank you might call already that you can direct question make the comment to either revolt of the professors."

[21:43]" It took both record Judy -- out money was. Approved by. Are. How."

[21:53]" And the team basically saying that the money needs to be urgently given away. I I find it to be challenging what I look at -- this picture of giving seven or ninety billion dollars away when when you look at in the -- and Obama. Campaign that -- it almost two years could -- and spend a billion dollars and we all know how much we -- their visibility in every every corner of US."

[22:18]" Mike do you think you'd like Mike this degenerate I don't know that it technically they were in the money's being given away as my understanding is that. There's going to be some purchase of of of shears. In banks to whom the money's going to be given professor Peterson let's just get that clarified first no one of them."

[22:34]" Big mistakes all along with letting people call -- a bailout it should have been called -- work out but if this is done right it should not cost the taxpayers anything. That's if we don't overpay for the essence if we don't just give money away. And the money that's invested in preferred stock should. Should come back have one little problem without I was little disappointed that we're only getting 5% where is Warren Buffett got 10% and preferred stock but. Apart from that. This should not. Cost money it -- it may warrant or it may end up costing something or we don't know but go go ahead might want to want to continue with you want to question I'm sorry."

[23:12]" Victim the part that -- confuses me is the individuals who were running company."

[23:17]" Thank -- very very bad investment very very speculative investing in."

[23:23]" Something that are not even really -- able to be given an asset value because it all on paper riveted and but I I don't let my business that way or my counsel -- elderly and then did not. Remove them from office and give them more money too lightly I find deplorable."

[23:42]" Gentlemen -- if you're free to respond it is deplorable. -- there's this and if their only. Gambling with -- each other's money and only hurting themselves I'd say let them go let them all fail. But when they threaten the entire system it's economists call this an extra banality of that threatens the entire system that -- after. Try to take some action and then that's the only excuse for doing this. But."

[24:09]" Alternately users. Can we use this small banks and allow them to had sent money into the -- and two. And the -- they were meant well and those that we're not -- well do. I get there -- let them have faded away."

[24:27]" Art I'm all with you -- but I'd love to do more for the small banks but the but the but it at least that judgment was made that the entire system would collapse. Now we let Lehman Brothers collapse and I think was the right thing to do -- what's what was one of the worst in terms of its --"

[24:46]" Even though -- to -- bailing out two of the three automakers. Who where does that wait is -- Mike let me just jump in this is -- right. Does it come appointed time and no the auto makers say we -- what 25 million dollars -- talking about today."

[24:59]" I would not do it. I let him go through chapter eleven. Kmart went bankrupt they stayed open the airlines go bankrupt they keep flying the auto firms can go bankrupt it -- get rid of some of their legacy costs and then."

[25:11]" So why are straight into the with the banks. Because that threaten the entire system. Can Mike thank you for the call good points questions thank you very much you know it's funny we do -- it seems like a big we are this big you are in this country. The more of the money the government's willing to prepare -- and do to help you. Is it does and it and economics professor. Over Harvard and I can't think you're listening for a moment he Rhoda a piece that essentially said. Let it all go bankrupt -- all the belly belly up the -- let the market purge itself like I hope I'm not. Quoting him. You know in accurately that maybe he's -- Cleveland these are Milton Friedman. Economist. You you feel you're convinced that it that it happened. It it could've been a real horror show here in the last month."

[26:02]" Yes I mean if it's a hard argument I understand the argument but. On balance site I think we had to do this I mean we saw what happened when Lehman Brothers failed -- spread to the rest of the world. And if we let more big ones fail. In the US it probably would have been even more chaotic through the rest of the world."

[26:51]" I don't I think it goes well beyond. Political considerations I think the auto industry has. Has. The president elect said today during his news conference that is not just -- ordinary industry that is central to our industrial development and it's not to see auto industry you're talking about all sorts of other. Industries that would fail if the auto industry fails as -- so I think that's one -- really would be justified but I think. Just strictly on the basis of politics it's not possible to have to let the auto industry just collapse in this country."

[27:25]" Okay so we have a little disagreement here between them the professor's on bail out of the automobile industry. It is it just because of the size is because it's it's big we have to say that if I'm going to be going to play devil's advocate with you on that. Take professor -- sides here I mean would save the banks because. They with the the arteries and the games of the system. I mean. Without credit everything dies but why -- we have to deal but we have to figure out industry don't give -- loud because for years. The Japanese and the Koreans and the Germans and the Swedes have built cars that are better cars or at least Americans are buying. Why should they not follow their own way."

[28:07]" Well because they're just too many people that would be hurt and it would be again that's hits from Wall Street to main street you're talking about this is main street that would be devastated. -- the auto industry went under."

[28:19]" Okay you wanna -- respond to him -- sure people can people who ought to buy cars are going to buy cars and if if people are buying cars the -- suppliers will be taking care of the workers will be there. They go through chapter eleven there reorganized and -- hurry. It doesn't mean they stop producing cars. Who loses a chapter eleven don't all of the other creditors creditors of the of the industry creditors those but but it's not clear that this bailout for the auto industry's going to be enough. And -- long as people see there on the birds as suppliers are going to be reluctant to send suppliers are going to be reluctant to lend. They go through chapter eleven. And suppliers to get first preference a new loans. On their credit."

[28:59]" But if I just get burned by the auto industry gold through chapter eleven and have lost all of my AM. You don't that the bills that upset -- thrown out the window and I don't know that I want to deal with -- Big Three again."

[29:30]" Legacy -- I happened by myself -- about 22 years ago when I bought in the cabin discreet. And."

[29:38]" You're a small businessman your -- front door."

[29:40]" Yeah exactly write a book mobile a number of fourteen I was today maybe another five dollars to build on what I'm. Well now -- that that the city block them. Itself alone. I don't know whether it's recession improved or whether or. Basically. The chips to seven -- in the city I'm -- people without stayed steady I do lyrical. Yet at the same time out because that would make it all money out there have been loading up on my mortgage payments epic by next mortgage payment than Google April. And you know I do the the the ability to refinance the medallion every once."

[30:18]" So who would you say Jim you're saying that you're doing okay."

[30:22]" I've well only because they do work -- about myself but you -- destroy it -- does close but I."

[30:29]" I wanted to be a Jim what are the medallion cost you when you lump. When you that you purchase this company."

[30:35]" We're and 1987 the trust me now and what 101991. It went down the 67000. I almost all of -- if you cell value lose okay so what's important. Are well. Before. Should come first it was a 380000. Pawtucket today. The -- at the -- and he because we can be sure of automobile. So you're not."

[31:04]" it was 91000. Dollars. To all of that you and effective quadrupled the that the value that the basic value of your business."

[31:13]" Yes and the -- and 1991. -- the British I don't want mobile launch boot I was launch 67000. It and I am by Marcus. A big mistake. But yet sure how much change."

[31:30]" I jumped but I do you allege someone off their gym you can get some -- yeah."

[31:34]" We actually drop a drop an awful rupiah in Cambridge where I would I wouldn't want to comment on them."

[31:40]" has got knowledge I was the -- the patriot like the show so far."

[31:46]" They don't have the capital I think it would -- if that's okay Caribbean right. -- away from. Where Greg where you from. Them okay we're going to and I gold for big night."

[32:00]" Yeah well and now we can't get out. Well we got back."

[32:05]" All right I'll be careful okay. And my girls."

[32:09]" Okay like in Portugal again I don't want comment that what want you around like -- tonight apart as far as. You know reinvesting back into light -- and that sort of thing just yet. -- You put your money given that fits into individual people. It will only be thanks so. Yeah it'll probably. The other I'm applying temporary stimulus but this animation project compliment that we are. -- ability to --"

[32:38]" Okay that's good that's great and that's what professor Peterson said hey let me ask you Jim of the girls left the cab and think good -- a bad tempers."

[32:46]" I don't really couldn't exactly yeah what are two point nine dollar on."