New York Times Blog Q&A with Bob McTeer

"On September 18, I was one of a group assembled by nytimes.com to respond to questions emailed in by readers. Here are the questions directed to me, which I had a chance to answer. The process was arranged and coordinated by Catherine Rampell of nytimes.com."   Bob McTeer

Does "Bailout" = "Nationalization"?

By Catherine Rampell

One of our first questions comes from Charles Callaway, who asks about the difference between a government "bailout" and "nationalization" – is it just semantics?

How does the bailout of A.I.G. differ from nationalization (excluding the obvious "only 85% of the company" and "conditional warrants")? – Charles Callaway

One of our panelists, Bob McTeer, an economist and former member of the Federal Open Market Committee, responds:

You are right. It was a takeover rather than a bailout – including having the secretary of the Treasury fire the C.E.O., who had only been on the job a few months. Being less that 100 percent may increase the chances of a quicker return to private hands. – Bob McTeer

Can Markets Correct Themselves?

By Catherine Rampell

Walter asks a question at the heart of most economic debates:

What is the state of the theory that "markets can correct themselves" in the light of current financial problems? – Walter

One of our experts, Bob McTeer, an economist and former Federal Open Market Committee member, replies:

The theory is in tatters because of the enormity of the impact of letting such large, interconnected entities fail. The interventions are done reluctantly, but are deemed necessary. Removing top management is a harsh effort to minimize moral hazard. – Bob McTeer

Would Helping People Keep Their Homes Do Any Good?

By Catherine Rampell

A reader asks whether helping people keep their homes would be a good strategy for preventing further economic meltdown:

If the underlying cause of the problem is poor mortgage lending and persistent foreclosures, why has the government not stepped in with an easy-to-access national program to keep people in their homes? Surely any amount they could pay toward a restructured loan would be better than this situation. – Jenny

From Bob McTeer, an economist and former member of the Federal Open Market Committee:

Excellent question. Probably because the problem is so complex since the mortgages were sliced and diced so much and spread all over the world. It's hard to locate owners of the mortgages to deal with. Also, they don't want to bail out speculators and house flippers along with people who were duped by lenders. They have made some efforts in your direction, but it's too slow.
– Bob McTeer

In English, Please?

By Catherine Rampell

We also received a lot of questions begging our experts to explain what's going on in plain English. Here's one:

Can you explain this crisis in a way that it makes sense in layman's terms?
-Michael

The economist Bob McTeer explains:

Banks used to make mortgages and hold them; so they only wanted to make good mortgages. With securitization, those who made the mortgages were different from those who held them, usually in the form of mortgage-backed securities that represented bundles of mortgages. Then, with house prices only going up, they started adding weak mortgages to the mix to increase return.

It worked well for a while so it grew and grew. Then the unthinkable happened: house prices started falling and people all over the world had a piece of the bad stuff.
-Bob McTeer

Thoughts on Short-Selling

By Catherine Rampell

One reader raises a question about short-selling – borrowing shares to sell on the expectation that the price will drop – a practice that the Securities and Exchange Commission has moved this week to restrict.

It seems to me that enforcing short-selling regulations or simply banning short-selling might help the current situation. What are your thoughts on short selling and how it plays in the downfall of some the financial giants? – MNeumann

Bob McTeer, formerly of the Federal Open Market Committee, says:

As a former economist what I'm about to say is very politically incorrect, but I never have liked the idea of short-selling, period. Seems like you ought to own something before you can sell it. I didn't even know about naked shorts until recently – where you sell stock without even bothering to borrow it. That is even more absurd. The short-sellers are the jackals picking out the weakest in a herd, destroying it, and moving on to the next weakest. Don't tell anybody I said that. – Bob McTeer

Why Let Institutions Become "Too Big to Fail"?

By Catherine Rampell

A reader asks about the "too big to fail" mantra:

Why should institutions that are too big to fail be allowed to exist? – Marc

Two of our panelists – Bob McTeer and Dwight M. Jaffee – point out that size is usually a reflection of success. Here's Mr. McTeer's take:

Perhaps limits on size are in the future, but the growth to the huge size suggests that they were providing some goods and/or services valued by the public. Of course, that applies more to organic growth than to acquisitions. – Bob McTeer

What Can History Teach Us?

By Catherine Rampell

Another question comes from Ann Tomlanovich, who asks what we can learn from historical precedents:

Are there any historical analogies (U.S. or world) we can draw from to find problem clarification and then subsequent solutions? Is the Fed Reserve in charge of the problem resolution? Which entity needs to take the lead? For me, restoring confidence can only happen if there is clarification of who is in charge of strategies for the public's evaluation.

The creation of deposit insurance after the massive bank failures of the 1930s is the example that first comes to mind. The Fed has had to take the lead because it is the only entity that can "create money" and act immediately. That will probably be institutionalized later. – Ann Tomlanovich

Bob McTeer, currently a distinguished fellow at the National Center for Policy Analysis, responds:

The creation of deposit insurance after the massive bank failures of the 1930s is the example that first comes to mind. The Fed has had to take the lead because it is the only entity that can "create money" and act immediately. That will probably be institutionalized later. – Bob McTeer

What Will Happen to Future Lending Practices?

By Catherine Rampell

A reader wants to know what lending practices will look like in the next few years:

Realistically how do you expect the current financial situation to affect future lending practices both in the U.S. and abroad? – Jordan Batchelor

Bob McTeer, formerly of the Federal Open Market Committee, says:

Future lending practices will become much more conservative for quite a while – until memory of this fades. If a cat sits on a hot stove, it will be a long time before it sits on a stove again, hot or cold. – Bob McTeer

From Consumption to Savings

By Catherine Rampell

Sue Halverson writes in with a few questions on consumption and consumer investment:

What changes in tax policy would stimulate a move from a consumption society to a savings society?

On Ms. Halverson's two questions above, and another on what government policies will stimulate the income (wage) levels of non-executive level employees, Bob McTeer, a former Federal Open Market Committee member, says:

Marginal tax rates should be kept low to provide incentives to earn income. Taxes on capital (capital gains and dividends) should be zero to encourage capital formation that would increase the productivity and thus the demand for workers. The corporate tax should be zero instead of the second highest in the world. Ideally we should switch from a tax on income to a tax on consumption.

Will Government Bailouts Lead to Inflation?

By Catherine Rampell

A reader asks about inflation concerns, and finds a divided response from our panel:

I'm worried about how much the government is intervening. It appears that the last remaining weapon the government will have is printing more money. Is hyperinflation a real concern down the road? – Geoffrey Bell

From Bob McTeer of the National Center for Policy Analysis:

That is a legit concern. However, so far the Fed has neutralized the overall impact on reserves and the money supply through offsetting open-market operations. The Fed's ability to lend is limitless because it can create money. Its ability to offset the lending is limited by its portfolio. Hence, its request to the Treasury to sell some extra Treasury bills. – Bob McTeer

Why Are People Talking About the 1930s?

By Catherine Rampell

A reader asks why people keep making reference to the Great Depression:

Experts have been stating that this is the most serious financial crisis since the 1930s. What exactly is meant by that statement? – David

A former Federal Open Market Committee member, Bob McTeer, says:

The whole financial system on which economies depend is at stake here. Financial collapse (mainly bank failures on a massive scale) contributed much to the Great Depression. Financial crises in recent times were much more limited in size and scope. This one is demonstrating a tendency to spread and feed on itself. – Bob McTeer

Should Mark-to-Market Provisions Be Suspended?

By Catherine Rampell

A reader writes in with a question on mark-to-market provisions – the accounting practice of valuing a financial position in an investment at its current market price:

Is any thought being given to suspending mark-to-market provisions that in the current hysterical environment promote a downward spiral in asset values? – Maggie Mudd

It certainly is, by Bob McTeer, a former president of the Federal Reserve Bank of Dallas:

Bingo! I've been harping on that issue for months, the latest times on the Kudlow show last night and in a piece I wrote for Forbes.com. I called it the low-hanging fruit last night. It's crazy to let strict adherence to an accounting rule cause so much damage. Spread the word. – Bob McTeer

More on Closing the Markets (or Not)

By Catherine Rampell

Some more panelists have responded to Luke's question, "Wouldn't it be safer to temporary close the markets?"

And Bob McTeer, a former Fed official, also says closing the markets without sufficient cause could lead to bigger problems on the day they reopen:

Probably if the government had an excuse to do so, as in 9/11. Doing it just because stock prices are falling would likely cause a massive sell-off when they were reopened. Russia has closed theirs for a couple of days. Maybe we will learn more from what happens there. – Bob McTeer