Markets continue to unravel

October 9, 2008

The world financial markets plunged again on Wednesday despite the fact that the US Federal Reserve and other central banks synchronized an interest rate cut. Wall St. speculators sold off in the last half hour dropping the Dow 190 points. TRNN spoke to Dr. James K. Galbraith who said that markets will continue to unravel unless the mortgage crisis is stabilized and people are stable in their homes.

The world financial markets plunged again on Wednesday despite the fact that the US Federal Reserve and other central banks synchronized an interest rate cut. Wall St. speculators sold off in the last half hour dropping the Dow 190 points. TRNN spoke to Dr. James K. Galbraith who said that markets will continue to unravel unless the mortgage crisis is stabilized and people are stable in their homes.



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Story Transcript

Markets continue to unravel

Producer: Carlo Basilone

CARLO BASILONE (VOICEOVER), TRNN: Markets on Wall Street plunged again on Wednesday, with players not taking the bait that an emergency half-point interest rate cut would end the paralysis in credit markets. After moving up and down all day, the Dow Jones nosedived almost 300 points in the last half hour, closing down nearly 190 points. The Federal Reserve and other leading central banks cut rates in the hope that credit markets would soon relax and that banks would begin lending more freely to businesses and consumers. The Fed was joined in the rate cut by the European Central Bank, the Bank of England, the Bank of Canada, and the Swiss National Bank. While investors clearly were happy with the actions of the central banks, they were also well aware that in the near term, banks remain reluctant to lend because of fears they won’t be paid back.

DR. JAMES K. GALBRAITH, COMMENTATOR, ECONOMIST, AND AUTHOR: There is, I think, a cumulative unraveling in the stock market that’s going on now, which reflects the fact that major investors feel that other major investors are all moving to treasuries as fast as they can. The only thing that can heal this mess is a concerted new program to deal with the underlying problems that are emerging in the real economy, to begin with, the housing crisis, the mortgage crisis, which is a crisis of people being forced out of their homes around the country. House prices will not stabilize easily on their own; house prices will stabilize when people are stable in their houses, and that is something that’s going to require renegotiation of a great many mortgages. That’s going to be a major effort that has to happen at the retail level, down there where the homeowners are. It’ll have to be decided whether there’s an extension of terms or reduction of rates will be sufficient, or whether so much would be converted to rental or rent-to-own, or whether people would be better off moving. But there has to be a renegotiation of the mortgages on a mass basis before the situation will stabilize; otherwise, foreclosures will continue to mount, house prices will continue to fall. The realization that this is going to require a very major effort I’m sure is what in part lies behind the unraveling of the markets at the moment. There needs to be a concerted approach to stabilizing the financial sector, to reestablishing effective supervision of loan originations. And in addition to that, because property tax revenues obviously fuel local and state governments, there needs to be a measure to preserve the jobs that are funded by property tax revenue at the state and local government level. So the whole concerted package of things is going to be required, and of course it’s not going to start happening until January at the earliest.

BASILONE: Now, even in January, how long will this last? Or, I mean, obviously, you don’t have a crystal ball, but, I mean, how long could this last?

GALBRAITH: Well, if you did nothing, you would still be in it in 8 to 10 years. If you build up the kind of program that I’m talking about, I think you could be out of it in 3. But we’re not talking about a short-term fix; this is a problem that has fundamentally poisoned the well of credit expansion, which was the driving force behind the American economy. And so I don’t see an easy, you know, short-term recovery from it. A boost to purchasing power would be very useful. And two things you could do might be really essential, because among the few things that one can think of that are on an appropriate scale, one would be to pass a general increase in social security benefits, let’s say, on the order of 25 or 30 percent, backed by the full faith and credit of the United States government. That would replace purchasing power lost by elderly people in the market crash. And then, secondly, you could declare a holiday of the payroll tax, which would add 7.5 percent to every working family’s pay packet immediately, and you would then have that much more money available to service their debts. So if it becomes necessary to make a large-scale, demand-side intervention in the economy, those are steps that, it seems to me, ought to be on the table.

BASILONE: Do you think it’s likely that McCain or Obama would do anything like that?

GALBRAITH: Well, it depends on the circumstances. People need to take account of how the situation is evolving. Obviously, the way one thought six months ago the economy would be, nobody would consider such a thing, and I wouldn’t have proposed it. But if we are looking at rapidly rising unemployment, you know, in January and February, then the question will not be whether large steps are required, but just exactly what those steps should be. And I’m sure there will be people out proposing cuts in capital gains taxes and other business-friendly measures, which have no consequence for the economy when nobody’s earning any capital gain. And what you need to do is put purchasing power back in the hands of working people and make it possible for them to service their debts. If that’s the situation, I can assure you that the options of the kind I’m just describing will be discussed.

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