The Evansville Courier & Press
The federal government's plan to thaw out frozen credit markets reached the Tri-State this week as Old National Bancorp and Fifth Third Bancorp were approved to receive part of $250 billion being set aside to encourage commercial banks to lend more money.
Paul Solman, the business and economics correspondent for "The Newshour with Jim Lehrer," discusses the roots of the credit crisis this week on "Newsmakers," a weekly public affairs television program produced by WNIN-PBS9 and the Courier & Press. The following is an edited transcript of Solman's interview with Courier & Press Editor Mizell Stewart III. The complete interview can be seen today at 11:30 a.m. on WNIN.
Q: You've tried in your work to really boil down what's going on in terms people can really understand. In doing so, you once said that any financial system more sophisticated than Robinson Crusoe is based on credit. In other words, credit began when one person began to deal with another in financial matters.
A: Think of a primitive economy where you and I are just sitting around. I'm fishing and you are picking fruit or berries or something like that. We could have more fish and more fruit and berries, but only if we both try harder - because, basically, we could just be eating what we've got.
But ... let's say I can get both fish and the fruit and berries, you can start making clothing for us so we don't freeze to death. How are we going to do that unless I say I'll give you some of the fish in the future and you'll give me some of the cloth that you're going to cobble together for me?
It's promises. It's on the come. It's in the future. Credit - credere, Latin for 'to believe.' Credibility. It's all built on belief once you get past one person.
Q: So how much of the credit crisis, in your mind, is psychological?
A: I think the economic system we live in is fundamentally psychological. This is not (an) original (thought) with me. It's built on optimism about the future. Spontaneous optimism, if you will. One famous economist called it 'animal spirits.' We'll all work harder together - independently, but based on the trust we all have in each other - to make more and more and become richer and richer, and that's how it works.
Q: But the role of leverage being huge in all this, particularly with investment banks borrowing large sums and not having the assets to back them up.
A: ... Look, everything's always been going up (in value). What happened with housing ... once you have a zero down or even less mortgage (some lenders offered mortgages for 105 percent of a home's purchase price), if the value of the home doesn't go up by five percent, the equity is zero. But what I'm saying is it's all part of a system of incredible optimism that things will keep growing and growing. We'll be able to pay off the debts from future receipts. But at some point, people go 'uh-oh,' I'd better get out before the next guy, and things come spiraling down.
Q: It feels like we're at the end of an era that's been driven by credit.
A: That's one way to look at it. I don't want to be too authoritative, because history might make a fool out of me. But the way I look at it now is that we're at the end of an era that started in the early '80s.
It started with (President) Reagan. After (former Federal Reserve Chairman) Paul Volcker, the Fed really took away the punch bowl - interest rates were 18 percent and 20 percent.
It crushed the economy. Unemployment was almost 11 percent in 1982. But it was 'Morning in America.' After a couple of years of living in the aftermath of the '70s, we can have it all. Budget deficits don't matter. More defense spending. Tax cuts. Supply-side economics. That approach continued for the next 20 some-odd years.
Q: When it comes to the credit crisis, what is it going to take to restore that trust in our financial markets?
A: Who knows? I'd love to be able to - in good conscience - say that you're the problem because you don't want to borrow to buy a new home or to expand your business. If you don't borrow, who's going to? You've got to get back in the game. You've got to buy. But how can I possibly do that?
Q: It's hard to do that when you're not sure of the underlying value of your home, you're seeing retirement accounts - you open that statement and see a sea of red arrows pointing down - at the height of the real estate boom, we were feeling rich, rich, rich. Getting back to the psychology, people don't feel as confident these days.
A: You asked me how would I restore confidence, and then when I tell you that you've got to spend, you say 'No, I don't feel confident.' That's the problem in a nutshell.