Terry Gross, Gretchen Morgenson, and the Government Bailout

Terry Gross interviewed Gretchen Morgenson tonight on the issue of Wall Street and the federal bailout. Verdict? Take 38 minutes to listen. Morgenson is refreshingly down to earth, and she makes the outsized problems comprehensible. Solutions? Not likely any time soon.

The takeaway revolves around a couple key ideas. First and foremost, the government probably saw this coming back in 2006. Morgenson strongly argues that only a fool or a catatonic could have missed the clear signs. Her feeling is that government lied when they told us that the risks and the damages would be contained to the subprime mortgage lending industry. In her words, we're simply all too "interconnected," and the markets are too interconnected, for any major financial failure to be effectively contained.

Now comes the tricky part. Gross asked her guest to comment on whether the current crisis is a repudiation of the Bush administration philosophy that free markets, unregulated, correct themselves. Morgenson, to her credit, avoided cheap shots or lectures and simply said that yes, the current situation is a pretty clear repudiation of that philosophy. She went on to argue that, had the government intervened back in '03,'04,'05, and '06, when people didn't "have to be ambulatory" or "have a pulse" to get a mortgage, when her "cat could have gotten a mortgage," we probably wouldn't be in quite this bind now.

Had the government regulated the Wild West of subprime lending, at least curtailing the most carnivorous practices of the worst predators, that would have helped. But the administration favored a laissez-faire approach, essentially allowing the very practices that eventually corrupted the more stable investment environments (think Morgan Stanley, Bear Sterns, Lehman, AIG) to fester and swell unchecked.

Extending bad loans to people who never had a chance to make the repayments was an effective--if deplorable--way to make money in the short term. But so much credit was extended over such a wide and unreliable base that, when the breaking point was finally reached, the repercussions were disastrous, as evidenced today. Simply put, too many homeowners couldn't pay back their loans, and no amount of repossessions could set that to rights because there wasn't enough credit left to fund new buyers of repo'd houses. Lenders took back the houses but couldn't turn them around, and the reverberations went right up the food chain. Turns out credit is a finite resource after all. Once it's used up on bad loans, lenders pull back and refuse to lend to even the most credit-worthy in an effort to simply hunker down, keep the capital close at hand, and weather the storm.

So now what? The same government that happily promoted its self-regulating, laissez-faire lending environment is now screaming for debt relief in the form of a $700 billion taxpayer rescue fund to buy up "toxic" investments in the hopes that banks will be able to recapitalize and start lending consumers money again. Each day brings a new promise from the Bush administration of imminent doom if we don't act now, no hesitation, no questions asked, no oversight, and no accountability no matter what we find out later. I've already mentioned how I feel about that. And taxpayers are offered nothing in return. Morgenson says there's a word for that, and it starts with an S. "The government is privatizing gains and socializing losses. . . There's something really wrong with that."

Morgenson doesn't know what happens next, but it's pretty clear to her that, bailout or no bailout, Wall Street and the U.S. economy are in deep trouble. Least of the problems is that more banks will fail. The bailout itself can't stop that, and appears designed in fact to simply avoid a total collapse of U.S. markets in the short term (and there's no telling what the next administration will actually face once January 20 rolls around). Much larger than individual bank failures, however, looms the possibility that this financial disturbance could be large enough and far reaching enough to turn foreign investors off of American debt. If China chooses to sell off its current investments in U.S. bonds in favor of an alternative that's "safer than the United States government," we could be in for catastrophic financial consequences. U.S. borrowing power would plummet, dollar values would certainly drop, and inflation would skyrocket.

On an upside, Morgenson believes that the American people have what it takes to rally and to pull through this "morass." She worries, unfortunately, that the government won't really live up to the best of American problem solving and ingenuity. If she's right about the first, and I of course believe she is, then we can all be hopeful. If she's also right about the second, though, we may have some unimaginably difficult times ahead.

Set aside some time, pull out a sudoku, and listen to the interview. I can't effectively critique Morgenson's economics, but her sensibilities sound right. Furthermore, she answers the key questions a lot of us are asking right now, and puts the whole scenario in terms we can understand, even if we may not like them.