Op-Ed, Paul Krugman: Cash for Trash

from The New York Times, Sunday, September 21, 2008

Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.

There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.

So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.

September 20, 2008
hp-1150

FACT SHEET:
Proposed Treasury Authority to Purchase Troubled Assets

Washington –  The Treasury Department has submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability, and help protect American families and the US economy. This program is intended to fundamentally and comprehensively address the root cause of our financial system’s stresses by removing distressed assets from the financial system. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs.  As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to significantly damage our financial system and our economy, undermining job creation and income growth.  The following description reflects Treasury’s proposal as of Saturday afternoon.

Scale and Timing of Asset Purchases. Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets.  Removing troubled assets will begin to restore the strength of our financial system so it can again finance economic growth. The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.

Asset and Institutional Eligibility for the Program. To qualify for the program, assets must have been originated or issued on or before September 17, 2008. Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.  

Management and Disposition of the Assets. The assets will be managed by private asset managers at the direction of Treasury to meet program objectives. Treasury will have full discretion over the management of the assets as well as the exercise of any rights received in connection with the purchase of the assets. Treasury may sell the assets at its discretion or may hold assets to maturity. Cash received from liquidating the assets, including any additional returns, will be returned to Treasury’s general fund for the benefit of American taxpayers.

Funding. Funding for the program will be provided directly by Treasury from its general fund.  Borrowing in support of this program will be subject to the debt limit, which will be increased by $700 billion accordingly.  As with other Treasury borrowing, information on any borrowing related to this program will be publicly reported at the end of the following day in the Daily Treasury Statement. (http://www.fms.treas.gov/dts/) 

Reporting. Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate Congressional committees with regular updates on the program. 

 -30-

(Source: MSNBC.com)

updated 12:10 p.m. ET, Sun., Sept. 21, 2008

MR. TOM BROKAW: Our issues this Sunday: The American financial system in deep crisis.

(Videotape)

PRES. GEORGE W. BUSH: Given the precarious state of today’s financial markets and their vital importance to the daily lives of the American people, government intervention is not only warranted, it is essential.

(End videotape)

MR. BROKAW: Can a government rescue plan save our economy? And at what cost to U.S. taxpayers? What else do we need to know? We’ll ask the man in charge, Treasury Secretary Henry Paulson.

How can confidence be restored in the markets? Is it going to get worse before it gets better? An exclusive interview with billionaire businessman-turned-New York City mayor Michael Bloomberg.

Plus, what does the turmoil on Wall Street mean for Americans on Main Street? What effect will all this have on the race for the White House? Insights and analysis from our economic and political roundtable: Erin Burnett, anchor of CNBC’s “Street Signs and co-anchor of CNBC’s “Squawk on the Street”; Steve Liesman, senior economics reporter for CNBC; and Steven Pearlstein, award-winning business columnist for The Washington Post.

But first, joining us now, the man at the helm, Secretary of the Treasury Henry Paulson.

Mr. Paulson, welcome back. We last saw you in Beijing, we didn’t think we’d have you back under these circumstances quite so quickly. There are a lot of tough questions out there, I know that you’re fully aware of that. Let’s just take our audience through some of them. This is the biggest financial play in the history of any economy, any time in the world. You’re talking about a 500 to $1 trillion bailout of mortgages and mortgage-backed securities. There’s no assurance that we’ll get anything back from the banks for doing that for them; the taxpayers won’t be protected. The details are still to be filled in. If you were in your old job as chairman of Goldman Sachs and you took this deal to the partners, they’d send you out of the room and say, “Come back when you’ve got a lot more answers,” wouldn’t they?

SEC’Y HENRY PAULSON: Tom, I don’t look at it that way. This is not something that we wanted to do; this is something that is very necessary. We’d had excesses building up for sometime in this country. They played out first in terms of bad lending practices, irresponsible borrowing, irresponsible lending; then moved a chain reaction into the financial institutions, illiquid assets; that then has played out into the broader economy. Last week there were times when the capital markets or credit markets were frozen. American companies weren’t able to raise financing. That has very serious consequences. So what we need to do right now is stabilize the markets, and this is for the, for the benefit of the taxpayers we’re doing this, the American public. Then, once we get behind this and get this stabilized, there’s a lot we can talk about in terms of reform.

MR. BROKAW: Well, let’s talk first of all about how this happened. Is it as a result of speed and the complexity of these instruments now, and the fact that no one really has their hand on the instruments that they’re selling, they just pass them along?

SEC’Y PAULSON: Tom, that is one of the reasons. There have been excesses, I said, for a long time. We have overcomplexity. Mortgages are now securitized, sliced and diced, put into tranches, sold all over the world. There is a great deal of risk into this–in, in the system. That is one of the reasons. As I said, there’s just been irresponsible practices. Borrowers have done things that were irresponsible also. But there’s a lot of, a lot of mistakes made.

MR. BROKAW: Let me show you how you’re portrayed on the cover of Newsweek this week. You’re described as King Henry, the man who can make these calls. And this was the result of–this was the response of the ranking Republican on the Senate Banking Committee. He said, “This could be the biggest bailout in the history of the country, ultimately costing 500 billion to $1 trillion. … Congress is not going to rubber stamp something. … Up to now, I believe the Fed chairman, in all due respect to him and the Treasury secretary, have been jumping from crisis to crisis like putting out a brush fire rather than some comprehensive plan.”

All of this will be borne on the backs of the taxpayers. And I know that it’s urgent to do something. But don’t taxpayers deserve more answers than they’re getting about, first of all, the value of what you’re going to have in terms of mortgages–it’s very hard to determine what that value is–and what you get back from the banks? Are you going to get warrants from these banks that will be converted into stock at some point as a form of collateral?

SEC’Y PAULSON: Tom, there are a lot of questions, and I can understand there are a lot of questions. This is an urgent matter, and we need to move very quickly. But let me get to the first question. Yes, the cost. You know, I don’t like the fact the taxpayer’s being put in this position, but the numbers that are being used, which are–you know, we’re talking about hundreds of billions of dollars–remember, this is not an expenditure, this is money that is being used to purchase these assets, as you said, these illiquid mortgage assets, which are very difficult to value. They will be held, and then they will be resold at some time. And so we can’t determine what the cost is today. That’s going to be based upon how quickly the economy recovers, what happens in the mortgage market. But I can assure you the cost won’t be anything like what is put out to buy these investments and these assets. And when the assets are sold, the money will come back into the treasury.

But, again, this in not a position where I like to see the taxpayer. But it is far better than the alternative. The situation we had last week, where credit markets were frozen–you know, the stock market, the average American watches the stock market. They watched the stock market drop about 1,000 points and then recover on the news of this plan. But what they don’t see is what’s going on in the credit markets. And when companies can’t borrow money and–this has a big impact on everyone. It’s difficult to get jobs, it hurts people’s budgets, retirement savings. This is a serious situation, and we need to avoid this.

MR. BROKAW: The market did go up a record amount. Since 1987 it went up more than 600 points in two days. But that really is a false positive sign, as they would say in laboratory testing, isn’t it?

SEC’Y PAULSON: Yeah, I, I would say this. It’s not what we should be looking at. It is not what we should be looking at. The stock market going up and down is not what we should be looking at. We need to look at what’s going on in the credit markets, and they are still very fragile right now and frozen. And we need to do something to deal with this and deal with it quickly.

MR. BROKAW: There is a big political debate about whether, whether the fundamentals of the American economy are strong or not. Is it fair to say that the fundamentals of the American economy may not be strong, but, in fact, they’re staggering at the moment?

SEC’Y PAULSON: Well, what I should say is, I won’t bet against the American people. We’re an entrepreneurial people, a hard-working people, and we will work through this, we always do. I wouldn’t bet against the American people, and I wouldn’t bet against the long-term fundamentalists of this country. But this is a humbling experience to see so much fragility in our capital markets and to ask how did we ever get here.

MR. BROKAW: You want this all to be run by the Treasury Department. There are a lot of that people say, “Wait a minute. With all due respect, Mr. Secretary, you and the Fed and the SEC have been wrong up to this point. What we need to do is create something like FDR did in the 1930s, a separate agency.” Warren Buffet says we need a nonpartisan czar to run all this so that we can go from one administration to the next without any kind of political interruption. His first choice would be the man who will join us later in this broadcast, Mike Bloomberg, the mayor of New York City. Why isn’t that a better idea than having Treasury run it? Because you’re going to leave office in January 20th.

SEC’Y PAULSON: Yeah, Tom, what I’m doing is reacting to deal with a situation we, we see in front of us today. And to do so in a way that, as I said, protects the American taxpayer. And I think what we need to do is have authority to move very quickly to purchase these assets, these illiquid assets from banks. And the plan we have, I think, is, is one that will work and will help us stabilize the market to get through this period. And then future administrations, there will be flexibility to run this any way they would like to run it, but what we need to do is have something that will work and work quickly.

MR. BROKAW: But once you get past the credit crisis, why not start now the process of creating the agency and simultaneously creating a new structure of regulation for Wall Street?

SEC’Y PAULSON: Well, let me deal with both topics, OK? First of all, a lot of people talk about the RTC. The RTC was set up after a broad group of savings and loans failed. And, in those days, there were whole loans, and the government owned the real estate, and you needed an agency to work out of the real estate. Here, we’re preventing failure. We–the financial institutions are clogged with illiquid loans, so what we need to do is quickly buy those loans. They won’t be giving us control of real estate, but this–we need to manage these assets and manage them quickly, and that, that is what we have in front of us today.

MR. BROKAW: And simultaneously develop new regulations that go into effect immediately?

SEC’Y PAULSON: Oh, oh yeah. Oh yes. Note that, Tom, that’s not doable, to do that immediately. But we very much need new regulations, new policies. What has gone on here is terrible, it’s unexcusable, and we need to deal with it. But that is going to take some time to figure that out and do it, do it carefully and well. Some time ago, months ago, I submitted a regulatory blueprint because we have a patchwork regulatory system that’s outdated, outmoded. It’s not a credit to our country, and it doesn’t match the financial world we’re dealing with today, but we can’t deal with that in a week, and we need this legislation in a week, because we have a–we have a problem in our capital markets that’s urgent to deal with, and we can deal with it when we get the legislation from Congress.

MR. BROKAW: As you know, Mr. Secretary, a number of people have been critical of your ad hoc approach to all of this. Senator Shelby said a “brushfire” approach to it all. You let Lehman, a venerated Wall Street firm, fail, but you got heavily invested in AIG, which is a large, complex insurance company. You bought 79.9 percent of it for $85 billion. Hank Greenberg, the man who really built AIG into what it is today, says that he and other major shareholders could save that company for $20 billion if they were given the opportunity. They could raise the money. And he also says that what you’re going to have as an asset at the end of the year, that won’t be worth anything because all the good AIG employees will leave if the government takes it over.

SEC’Y PAULSON: Well, a lot of people are saying a lot of things, Tom, and a lot of people want to rewrite history, but we’ve had some tough situations to deal with, and let me take them one at a time. There were no buyers for Lehman Brothers. It, it was a very sad situation to see a venerable firm like that go down, employees lose jobs. Again, it was, it was a tough situation. It would have been, in my judgment, unthinkable to have AIG declare bankruptcy. And you know, Tom, they were a few hours away from declaring bankruptcy. And what the government did was come in in a senior position, senior to the senior debt, well ahead of the shareholders, with, as you said, an $85 billion funding facility to allow the government to liquidate this company in a way in which it–we avoided a real catastrophe in our financial markets. AIG was so interconnected, it, it touched money market funds, it touched individual savings. This is a classic example. Insurance regulated by 50 different insurance regulators, and, and a holding company with just scant oversight at the federal level. Very much a hedge fund on top of insurance companies. Something like this, in my judgment, should never have happened. But again, we did this to protect the taxpayer, and this was–and it’s something we’re going to need to deal with in the future in terms of a regulatory system.

MR. BROKAW: Final question, Mr. Secretary. A number of investors, as you know, among the most sophisticated in this country, are pulling their money out of mutual fund money markets, and then the funds are having to go to the commercial paper, and that paper has been used to finance credit card companies and auto plants, and now Main Street banks, which finance Main Street businesses and auto dealers and agricultural farmers and so on. I’m wondering if there’s going to be any money for them. The domino effect of this is going to be a no-growth economy, isn’t it?

SEC’Y PAULSON: Tom, you made my case for me. That is why we need these answers. That is why we need Congress to move quickly. We, we had a situation last week where there was–there were instances of people pulling their, their funds out of money markets, and so we moved very quickly. We, at Treasury, used the estate–exchange stabilization fund to come in with a guarantee at–for money markets, to prevent that from occurring. The Federal Reserve moved very quickly to take steps to keep the commercial paper market operating. All of this is being done. And I would say to you, we need to deal the–with this situation to prevent what you just discussed. And, again, it pains me, it pains me tremendously to, to, to have the American taxpayer be put in this position, but it’s better than the alternative. And you know what? We’re going to work through this situation. We always do. We’re going to stabilize the financial markets. It won’t happen immediately, there’re going to be bumps along the road, but we need to do it. And this’ll be far less costly to the American taxpayer than the alternative, and that’s why I’m confident that Congress is going to move and move quickly.

MR. BROKAW: Mr. Secretary, thanks very much for being with us.

SEC’Y PAULSON: Thank you.

MR. BROKAW: Coming up next, restoring confidence in Wall Street. I’ll have an exclusive interview with the mayor of New York City, Michael Bloomberg. Also, our economic and political roundtable right here, only on MEET THE PRESS.

(Announcements)

MR. BROKAW: An exclusive interview with New York City Mayor Michael Bloomberg after this brief station break.

(Announcements)

MR. BROKAW: Mayor Michael Bloomberg of New York City, welcome back to MEET THE PRESS.

MAYOR MICHAEL BLOOMBERG (I-NY): Thank you for having me.

MR. BROKAW: You’re in a three-way intersection. You’re the mayor of the city that’s at the epicenter of this Wall Street implosion, you’re a very wealthy investor, and you’re also the founder of Bloomberg Financial Services and Bloomberg News. You just watched Secretary Paulson. Were you reassured by his answers, or do you think we need to know more?

MAYOR BLOOMBERG: Well, I think number one, Hank’s the right guy for now. He knows what goes on on Wall Street, he understands these complex financial instruments in a ways most people do not and most Treasury secretaries do not. So if I had to have one person at the helm today, I would pick Hank Paulson. But I think you got to step back and say what’s the real problem here? There are two crises. One is the crisis in the financial market, a lack of confidence that almost closed down the financial system this past week and that Hank has to address. And it’s up to the Treasury with the acquiescence of Congress, but to do something quickly. And nobody knows exactly what they should do, but anything is better than nothing. You’ve got to restore the public’s belief and the market’s belief that we will go on. And this is not just an American problem, it’s financial markets around the world that are all interlinked and they’re all collapsing. The second problem, which is up to Congress, it’s a much longer-term problem and may be the genesis of the problem that we have today in the financial markets, and that is that people are losing their homes, deserted homes are destroying neighborhoods, people are losing their jobs. We have some industries that Congress tried to protect, and instead of protecting them they’ve caused them to not keep up in a competitive world with new products. We have an education system that isn’t preparing us for the future, and we have a retirement system that’s just not going to be there when we need it. So there’s two things here: One you got to do quickly; one you really need a lot more thought about and that Congress should spend that time debating. But I don’t know that there’s time for a lot of the debate now.

MR. BROKAW: I’m wondering if there is a system, however, that you can build in that is a kind of fail-safe system for getting some of those answers once you act with alacrity. This is a country now that has watched us go to war with, in the judgment of a lot of people, not enough questions being asked and being answered. The Patriot Act was passed very swiftly. A lot of people, Republicans and Democrats, believe that was a big mistake, that it needs to be restructured. Same thing with Homeland Security. But how do you build that in to getting the passage that needs to be done this week so that the taxpayers can be assured that they’re not just carrying Wall Street on their backs after all this irresponsible lending?

MAYOR BLOOMBERG: You can put some safeguards in, but you don’t have time to build in the safeguards that you should have for long-term. And we’re paying the price for the last years where we all wanted something for nothing, where we took risks because we were convinced that we would never have to pay, somebody else would pay on the downside, but we’d keep the profit. Congress has been unwilling to address the fundamentals of this country–an energy policy that makes sense, infrastructure, health care, all of these kinds of things. So you want something that overnight we can do, what Hank Paulson’s been arguing for a long time.

Regulation’s a good example. Our regulation in this country is designed for the world of 50 years ago. We have separate regulation for different industries, except today those industries all do the same thing. Also, our regulation isn’t consistent with regulation around the world. And every company, every bank, your job, my job, all our jobs depend on commerce and what happens elsewheres in the world. And we have to find a ways to, to pull together, in Congress not have all of the different oversight committees, in the executive branch not have all the different agencies, and not just think that we’re the only ones that can do this, but pull it all together. Paulson’s been talking about it for a long time. But I think it, Tom, it comes out of this instant gratification. We all were happy when the stock market was going up, we were all happy when there was all this money sloshing around in the economy, and everybody could get a loan whether they could pay it back or not. When companies went out and bought other companies and people got great bonuses, it was great. And nobody wanted to say, “Wait a second, this can’t go on forever.” I’m happy to say in New York, at least, we didn’t think it was going to go on forever and for the last couple years we’ve been salting away money. I don’t know that we’ve salted away enough, but we’ve been saying again and again nothing goes up in a straight line forever.

MR. BROKAW: I moved to New York in the 1970s. The city was on its backside at that time. Real estate prices were depressed–not just suppressed, but depressed. Central Park was a mess, the infrastructure was in desperate need of a lot of work. Are you going to go crashing back into the 1970s in New York as a result of what’s happening on Wall Street?

MAYOR BLOOMBERG: No, we’re not going to make the mistake–the mistake that was made in the ’70s is we stopped policing the streets, we stopped cleaning the streets, we stopped cleaning the graffiti off buildings, we stopped supporting our cultural institutions and building parks and schools and all those kinds of things. We are going to go ahead and continue those things. We may have to stretch out some construction projects, we may have to ask people to do more with less. We may not be able to have the frills at the edge, but we are not going to walk away from our city. That’s the prescription for disaster. When you do that, your tax base leaves, and the rest of this country, as well as New York, are going to have exactly the same decisions to make. The taxpayers are going to have to decide do they want to have a future or not? If they don’t want to have a future, then they’re not going to have to pay as much now, but if they want to leave a better world for their kids, they’re going to have to pay the bills up front.

MR. BROKAW: We do know that you’re exploring the possibility of getting a third term. The rules would have to be changed. You’re term limited out at the end of two terms. There is some exploration going on. Would you like to serve a third term under these circumstances?

MAYOR BLOOMBERG: Well, I have 466 days left to go in my job, and I was sort of thinking, maybe, to be host of this program. That would be a nice job for me. Probably pays a little bit better than the dollar a year I get now.

MR. BROKAW: It–your net worth, however, puts the rest of us to shame, so I’m not…

MAYOR BLOOMBERG: Well, that–be that as it may, it’s all going to charity. You know, I think one of the things we have to focus on here, Tom, all kidding aside, is that there is a partisanship that has paralyzed our country. Both parties have redistricted themselves such that they don’t have to worry about a challenge across the aisle, but they have to have–they worry about a challenge from their flanks, so the conservatives are less willing to move to the middle, and the liberals are less willing to move to the middle, and we’ve got to get over that, and we’ve got to understand that we’re all in this together. Unless we have bipartisan legislation and bipartisan governing at the federal, state, and city level, we’re just going to have one problem after another, and the future’s not as bright as I think it should be for America.

MR. BROKAW: We want to share with our audience what you had to say about society in general, not just Wall Street. This comes from the Daily News. “`An “I want it now” society that refuses to live within its means, that’s partly responsible for the subprime-mortgage crisis,’ Mayor Bloomberg said.

“`I think you can’t blame just the banks,’ he said, taking borrowers to task.

“`They say, “I want the great American dream, I want it now, and I’m not going to wait until I put some money in the bank.” That’s where we lost the moral compass of saying no to people who did not have the earning capacity to support a mortgage.’” Most people believe that you have, for a public figure, as strong a take on what this country needs to do as anyone in public office right now. So why not follow Warren Buffett’s recommendation, come to Wall Street, come to Washington, and say, “I’m here to serve this country, I’d like to take over the agency and try to manage our way out of all this.”

MAYOR BLOOMBERG: Well, number one, I’d do anything that the country asked me to do, but I do have a job in New York. I’ve committed myself to the voters and the taxpayers and the citizens of New York to do the best job I can, and we’re going to go through some very tough times. We’ve been prudent, we’ve cut back, we’ve saved money, but this will hurt us. It’ll hurt every city and small town, big town, big cities in this country. It’s hurting us around the world, and I think that there are other people who have plenty of qualifications, but I do have a job already. If the government asked me to help, I’d be happy to give my advice, and I’ve tried to stay in contact with both the presidential candidates, talked to both of them every couple of weeks, and give them my views. They should just not take them as gospel, but add them into the mix, and they should get advice from a lot of people. There are a lot of smart people out there.

MR. BROKAW: In the spirit of what the country needs to face up to, and in the candid spirit of Mike Bloomberg, going beyond the borders of New York City, is this country in for a no-growth year, very likely a recession, as a result of what we’re going through?

MAYOR BLOOMBERG: Well, I would describe the country as resilient, and I think that we have a better hand to play than anybody else. We are not immune to problems or to problems overseas, and we’ve got to understand that. But if you take a look at all of the great strengths of America: entrepreneurialship, work ethic, natural resources, a democracy, a transparency, a willingness to be critical. You know, around the world, they look at us, and they say, “Why are you criticizing yourself? Why are you people arguing during the political process to elect a president or somebody else?” That’s the great strength of this country. So, long term, I think we’re in good shape. Short term, we are going to have problems like everybody else, and I think the general economic consensus is that this will be a year of no growth or perhaps worse. We’re projecting tax revenues in New York City to fall, the economically sensitive taxes, by 12 percent in this fiscal year, and I think that’s not being too conservative. I hope it’s not being too expansive and too optimistic. I am–I think, I think everybody should be doing this in all parts of government–I’m planning for the worst and hoping for the best.

MR. BROKAW: Is Wall Street going to have to be completely restructured in terms of the regulations that govern it?

MAYOR BLOOMBERG: I’m planning for the worst and hoping for the best.

MR. BROKAW: Is Wall Street going to have to be completely restructured in terms of the regulations that govern it?

MAYOR BLOOMBERG: Paulson has always talked about reforming regulation. I think the first thing we need is more disclosure visibility. The problem is that nobody knows what any institution owns and what the terms of the securities they own are and what they’re worth. If that was out in the public domain, then there wouldn’t be this crisis of confidence. You could say “This company’s worth less,” “This company’s worth more,” “I don’t like what they own,” “I do like what they own.” But right now nobody knows what they own. In fact, the managements of a lot of these companies, I’m convinced, never knew what their traders were buying and what the risks were. And they, every day, wake up not having any idea what’s going to happen to them. When things were going up, it was great, nobody paid attention. We were all comfortable with letting that situation continue. Now, all of a sudden, things are going down for a variety of reasons. It started with maybe the increase in oil. It started with overbuilding in the real estate residential part of the market. It started with just the end of a cycle. Nothing goes up for ever. And then all of a sudden we’ve said, you know, “What’s happening here?” So if you started with disclosure, then you could really approach the regulation issue. We need more regulation.

But I think–let me get back to this bipartisan or partisan thing. What the Democrats have to understand is that while we do need to reform our regulation and we do need more restrictions, it is true that it is capitalism and free enterprise and companies that create jobs and wealth for every American. And what the Republicans have to understand is, while it may be capitalism and free enterprise and companies that create jobs, we have to have regulations that are realistic and they have to be followed. And I think if both parties could learn that and come together then there really isn’t that much difference between them, and they can go and take this country to the next level.

MR. BROKAW: But shouldn’t there be an urgency about that and a parallel track to this bailout?

MAYOR BLOOMBERG: Absolutely. Absolutely. But I think one is literally measured in weeks and the executive branch of government has to be the solution, and that’s the lack of confidence in our financial markets and in the institutions that make up those markets. The other is the longer-term focusing on the problems that, in the end, got us here. We, we spend money we don’t have. We have trillion dollar deficits. We have a birth rate that’s too low to support Social Security. We have a health care system that’s going to bankrupt us. We’re going to spend 25 percent of our GNP on health care, and we get worse health care than they do in western Europe and they spend less money. Our public education system throughout this country–we worked hard on it in New York–but we all have–and other cities are doing it, too–but we have a long ways to go.

We have an energy policy–we’re transferring our wealth to overseas to a bunch of countries that don’t have the same values as us. In some cases, they’re using our money to finance terrorism against us. We’ve got to sit down–infrastructure as well. There’s a whole list of things. Immigration. We don’t have an intelligent policy. Those are the things we’ve got to do. But that has got to be done in Congress. It needs leadership from the other end of Pennsylvania Avenue, from the White House, but it needs bipartisan cooperation no matter how this next election turns out.

MR. BROKAW: Mr. Mayor, I can just see a viewer out there in Lubbock, Texas, for example, or Kearney, Nebraska, or Dahlonega, Georgia, or any small town in the Northeast saying, “Wait a minute. I didn’t do all of this. This is Wall Street wildly out of control, big executives walking away with hundreds of millions of dollars in bonuses for failing, in effect. Why am I paying it?”

MAYOR BLOOMBERG: I do not, number one, I do not think that anybody should get paid for lousy performance. I’ve said that for a long time. And we don’t do that in my company. If you work hard and you do good, you get paid well. That’s the answer. And I was pleased to see when we bailed out Freddie and Fannie and AIG, the top management got fired, and the stockholders basically had all of their value wiped out. Bear Stearns went out of business, so everybody lost everything. Jobs as well as…

MR. BROKAW: Do you think your old company, Lehman, should have gone out of business?

MAYOR BLOOMBERG: I never worked at Lehman, but I think it’s easy–you can make…

MR. BROKAW: Oh, you were at Salomon. Sorry.

MAYOR BLOOMBERG: Yes, Salomon. You can have a discussion as to whether, in the case of Lehman or Bear Stearns, the Treasury should have bailed out both, neither, or one or the other. I think that just happens to be more the luck of the draw. Bear Stearns was first, got bailed out. Lehman came a little bit too late in the process. But I do think that the government had no choice but to stand up and do the right thing and bail out Freddie, Fannie and AIG. Fannie and Freddie would have destroyed homes for people throughout this country. The, the people in those small towns that you talked about, it’s their homes that got financed through Freddie and Fannie. And AIG could just have destabilized the whole system. It’s at a different level. But sometimes it isn’t that they’re too big to fail, they’re too important to fail. And that’s not true necessarily with individual brokerage firms. It is true of these poorly constructed, poorly designed institutions like Freddie and Fannie where we socialize the losses and privatize the profits. And it is also true of AIG, that has these enormous contracts on their books that probably nobody understands.

If we had better disclosure, then you could take a look and say, “Well, maybe we could let them go under.” But without knowing–and that’s the situation that the Treasury’s in, they don’t know the facts. The facts are not discernible right now because we never put in the regulation that would let us be able to measure. Why didn’t we? We all are guilty. I come back to it. Our pension funds were getting better, our 401(k)s were getting better, we were getting mortgages at low interest rates. Everybody was happy. The trouble is it was something for nothing, and there’s always–you know, there’s the old story about you got to pay the piper. In the end, the bill comes due.

And I think that you and I have to worry about the person that can’t get through this, that really needs help. And that’s what we’re trying to focus on in New York City. We can’t go pay off people’s mortgages, but we’re trying to do the best we can to help them when they get in trouble. And we have a program in the city, incidentally, where we’ve made thousands of mortgages–housing program for people who are really starting up the economic ladder. And I checked earlier this morning with the guy running it, Shaun Donovan, we’ve had only five defaults out of thousands of mortgages. So if you act intelligently, if you work with people who want a mortgage, show them what kind of deposit they have to have and make them work hard until they get it and make them not overextend and say, “What happens if you lose your job?” you can have an intelligent housing policy. We just have gotten carried away, and now we’re getting the other end of it.

MR. BROKAW: Let’s talk politics for a moment. John McCain began this campaign cycle as the man with the most experience, then he became an agent of change, now we saw in his advertisement here that he’s back to experience again. Here’s what you had to say about McCain: “McCain can say he’s had more experience. It’s harder to argue that he would dramatically change where we have come from.” He insists that he will. The Democrats are going to make the case this is just a third term of George W. Bush.

MAYOR BLOOMBERG: I think there’s two separate things here. You say one thing to get elected, and both candidates have to be very careful. They have to explain complex problems and come up with solutions for basically insoluble problems that have been with us for a long time. And the public demands that they do that in 30 seconds. And I’m sympathetic to them. They just cannot give you specifics on how they’re going to do a lot of these things.

Number two, they’re going to face different problems than we have today. So, when I look at them, I don’t have this litmus test issue on different things, “What are you going to do about A, B and C,” because they are going to face D, E and F, whoever wins, when they’re in office. And I said to Barack Obama the other day on the phone, I said, “You know, you’ve got to start thinking about, for example, who we bail out.” We can’t spend our time talking about the bailouts in the past. You’ve got an automobile industry that has–in Detroit they’ve cut employment from 500,000 people down to 250,000 people. That’s 250,000 Americans. You know what a group of 250,000 people–it’s a lot of people. They’ve lost their jobs. Today, if they have jobs, they probably don’t have as good jobs. Why? What were we doing wrong? I would argue that we tried to protect an industry where we should have been assisting people. We should have been working on training, we should have been working on regulation that would force them to come up with products that are good for the world so that they can sell them and keep their–keep jobs, good-paying jobs with benefits. That’s what we’re trying to do in this country. And where you let the free markets work, generally it does. But free markets cannot work without some regulation.

MR. BROKAW: Joe Biden, who is the vice presidential candidate on the Democratic ticket…

MAYOR BLOOMBERG: I know who he is.

MR. BROKAW: …says it’s patriotic for wealthy Americans to pay more taxes.

MAYOR BLOOMBERG: Well, Joe Biden was in my office last year, and I don’t remember him saying that.

MR. BROKAW: Well, he said it this past week.

MAYOR BLOOMBERG: I do remember reading that. You know, I think–I’ve always been a believer that one of the real differences between America and other countries is that we do pay our taxes. There are very few people here that don’t pay their taxes. We have lots of arguments over what those taxes should be, and there are tax shelters and sometimes there are abuses, and we have to work on that.

MR. BROKAW: Should capital gains tax go up from 15 percent?

MAYOR BLOOMBERG: I think you can make–economists will make the argument that capital gains taxes going up will dissuade people to invest. People will make the argument that it’s not fair that some people make their money in capital gains form rather than an ordinary income. I’ll leave that for the economists and the tax policy writers to debate. But I think everybody understands we like to have lower taxes. But if we want services, we’re going to have to pay for them. And the worst thing we’re doing is to do the worst–take the services but not have us pay for them. That’s the situation where we’re going to lead–leave a terrible world for our children and grandchildren.

MR. BROKAW: Finally, Mr. Mayor, are you going to endorse in the presidential race before the election?

MAYOR BLOOMBERG: Well, I’ve listened to both candidates and I want to make sure that, for as long as I can, I have a good dialogue with both, that I can give them my views and the perspective of New York. I represent 8.3 million people in New York, and it’s important that these two candidates understand what’s in the interest of those people, and so I want to make sure that I have a good dialogue with both. The future of this country is great, but it’s–it’s better than anyplace else, but it is going to require great judgment and leadership on the part of whoever wins. And their main job is going to be to lead Congress to work together and to give us the kind of regulation, the kind of tax policy, the kind of financial world, and investments that in tough times we’ve got to make that this country needs.

MR. BROKAW: Mr. Mayor, thanks very much for being with us.

MAYOR BLOOMBERG: Tom, my pleasure.

MR. BROKAW: Thank you.

MCCAIN: You know, we’ve heard a lot of words from Senator Obama over the course of this campaign, but maybe just this once he could spare us the lectures and admit to his own poor judgment in contributing to these problems.

The crisis on — the crisis on Wall Street, my friends, started in the Washington culture of lobbying and influence-peddling, and he was right square in the middle of it. My friends, this is the problem in Washington. People like Senator Obama have been too busy gaming the system and haven’t ever done a thing to actually challenge the system. That’s not country first. That’s Obama first.

Give me a break.  The “culture of lobbying and influence-peddling?”  There are two problems with this.  Most of McCain’s campaign leadership is composed of lobbyists taking a break from K Street to invest some time into what they hope will be a cozy future.  This includes McCain campaign manager Rick Davis.  And, on the other hand, who in the I-want-to-be-president room is one of the Keating Five? 

McCain also went after Obama for taking Fannie and Freddie related campaign contributions as well as advice from two former CEOs of the companies.  What he didn’t say is that he’s taken his share of Fannie and Freddie dollars and two of his campaign leaders lobby for the companies. Hypocrisy.

While shoot from the hip John proposed a name today for what everyone thinks will be a new Resolution Trust-type federal entity, Barack met with a team of leading U.S. economists and outlined several principles he will apply to his consideration of Bush Administration and Congressional action on the crisis. 

After watching coverage of the two candidates today, it’s no question who looks like a leader: calm, cool, and calculating in the middle of crisis.  It was Obama.

We are facing one of the most serious financial crises in this nation’s history.  The events of the last week – from the failure of Lehman to the bailout of AIG to the continued volatility of the market – have not just threatened the trading floors and high-rises of Wall Street, but the stability and security of our entire global economy.  Across this country, Americans are worried about whether they can make their mortgage payments, or keep their jobs, or ensure that their retirement is secure.  Truly, we are all in this together.  
 
Our government and the Federal Reserve have already taken unprecedented action to prevent a deepening of this crisis that could jeopardize the life savings and well-being of millions of Americans.  But it is now clear that even bolder and more decisive action is necessary.  
 
In recent years, I have outlined plans that would have helped prevent the problems we now face, and yesterday I proposed the outlines of a plan that would establish a more stable and permanent solution to strengthen our financial system.  Today, I fully support the effort of Secretary Paulson and Federal Reserve Chairman Bernanke to work in a bipartisan spirit with Congress to find this kind of solution.
 
What we’re looking at right now is to provide the Treasury and the Federal Reserve with as broad authority as necessary to stabilize markets and maintain credit.  We need a more institutional response to create a system that can manage some of the underlying problems with bad mortgages, help homeowners stay in their homes, protect the retirement and savings of working Americans.
 
In the coming days, I will more closely examine the details of the Treasury and Fed proposal, and as I do, I’ll work to ensure that it provides an effective emergency response by including four basic principles that my economic advisors and I just discussed this morning.
 
First, we cannot only have a plan for Wall Street.  We must also help Main Street as well.  I’m glad that our government is moving so quickly in addressing the crisis that threatens some of our biggest banks and corporations.  But a similar crisis has threatened families, workers and homeowners for months and months and Washington has done far too little to help.
 
For too long, this Administration has been willing to hit the fast-forward button in helping distressed Wall Street firms while pressing pause when it comes to saving jobs or keeping people in their homes.  We already know that the credit crisis that has emerged from our largest financial institutions is becoming a credit crunch for small business owners, homeowners, and students seeking loans in big cities and small towns.  Now that American taxpayers are being called on to share in this new burden, we must take equally swift and serious action to help lift the burdens they face every day.
 
In the same bipartisan spirit that is being shown with regard to the crisis on Wall Street, I ask Senator McCain, President Bush, Republicans and Democrats to join me in supporting an emergency economic plan for working families – a plan that would help folks cope with rising gas and food prices, spark job creation through repair of our schools and roads, help states and cities avoid painful budget cuts and tax increases, help homeowners stay in their homes, and provide retooling assistance for America’s auto industry.  John McCain and I can continue to argue about our different economic agendas for next year, but we should come together now to work on what this country urgently needs this year.  
 
The second principle I would like to see in the emerging plan from the Treasury and the Fed is that our approach should be one of mutual responsibility and reciprocity.  It must not be designed to reward particular companies or the irresponsible decisions of borrowers or lenders.  It must not be designed to enhance the personal gain of CEOs and management.  The recklessness of some of these executives has helped cause this mess, even as they walk away with multimillion dollar golden parachutes while taxpayers are left holding the bag.  As taxpayers are asked to take extraordinary steps to protect our financial system, it is only appropriate that those who benefit be expected to contribute to the protection of American homeowners and the American economy. Just as support is not designed to payoff egregious executive compensation, it should not reward those who are ruthlessly foreclosing on American families.
 
Third, this plan must be temporary and coupled with tough new oversight and regulations of our financial institutions, and there must be a clear process to wind down this plan and restore private sector assets into private sector hands after restoring stability to the system.  Taxpayers must share in any upside benefit that such stability brings.
 
Fourth, this plan should be part of a globally coordinated effort with our partners in the G-20.  This is a worldwide issue, and while the United States can and will lead in stabilizing the credit markets, we should ask other nations, who share in this crisis, to be part of the solution as well.    
 
One last point.  We did not arrive at this crisis by some accident of history.  What led us to this point was years and years of a philosophy in Washington and on Wall Street that viewed even common-sense regulation and oversight as unwise and unnecessary; that shredded consumer protections and loosened the rules of the road.  CEOs and executives got reckless.  Lobbyists got what they wanted.  Politicians in both parties looked the other way until it was too late.  And it is the American people who have paid the price.  The events of this week have rendered a final verdict on that failed philosophy, and it will end if I am President of the United States.  We must build upon the ideas I have laid out over the last several years about how to modernize our financial regulation in this country, and establish commonsense rules of the road for our financial system to help restore confidence in our financial system.
 
Finally, given the gravity of this situation, and based on conversations I have had with both Secretary Paulson and Chairman Bernanke, I will refrain from presenting a more detailed blue-print of how an immediate plan might be structured until I can fully review the details of the plan proposed by the Treasury and the Federal Reserve.  It is critical at this point that the markets and the public have confidence that their work will be unimpeded by partisan wrangling, and that leaders in both parties work in concert to solve the problem at hand.
 
I know these are difficult days.  And I know there are a lot of families out there right now who are feeling anxiety – about their jobs, about their homes, about their retirement savings.  But here’s what I also know.  This isn’t a time for fear or panic.  This is a time for resolve and for leadership.  I know we can steer ourselves out of this crisis.  That’s who we are.  That’s what we’ve always done as Americans. Our nation has faced difficult times before.  And at each of those moments, we’ve risen to meet the challenges as one people, and one nation.  That is the America we need to be and can be today.