No replies to this topic

[milbank]

Q&A
Leonhardt Discusses the Economic Turmoil

Published: September 17, 2008

David Leonhardt, the Economic Scene columnist for the New York Times, answers readers' questions on the implications of the A.I.G. rescue and the road ahead for the beleaguered financial system and the economy. Ask a question.

Q. Now that the government has control over A.I.G., what does this mean and what do we expect over the next few months? Also, where is the government getting the money to help A.I.G.? Isn’t the U.S. already in deficit? What would this mean from a taxpayer’s point of view? Would we expect taxes to increase over the next few years?

— James Hershberger

A. At the end of all this, the actions by the Federal Reserve and the Treasury are likely to increase the deficit. They’re trying to solve big problems, which usually costs money. There is always a chance that the government will make money on the stakes it is taking in these troubled businesses, as it did when it bailed out Chrysler in 1979. But it’s not the most likely outcome.

And will taxes have to increase? Almost certainly. The government is already running a significant deficit, and it is facing big future commitments, mainly in the form of Medicare. As nice as it would be if we could get rid of the deficit by cutting taxes, we now have 30 years of evidence suggesting otherwise.

Q. Is there more to come?

— Betsy Peyton

A. You have to assume that there is more to come. The main cause of all these problems is the decline in house prices, which has led to a collapse in the value of mortgage securities. House prices almost certainly have further to fall. Relative to the fundamentals — rents, for instance, or incomes and interest rates — prices are still 5 percent to 10 percent too high, on average, across the country.

As Alex Berenson pointed out in The Week in Review on Sunday, Wall Street has been predicting the imminent end of this crisis practically since it began. So far, every one of those predictions has been wrong.

Q. What would have been the best way to prevent the subprime crisis from happening?

— Mark

A. At the top of the list is more serious government oversight. Regulators assumed the market would police itself. It didn’t. I’ve written a couple columns on this subject, for readers who are interested in more.

Q. What is the impact on money market accounts (those offered by commercial banks) and those provided by money market mutual funds ( e.g. Vanguard, Dreyfus).

Are these accounts safe, especially those of money market accounts by commercial banks that do not have the objective of maintaining share/unit value at $1.00?

— T. Kosky

A. I forwarded this question to Ron Lieber, who writes the Your Money column for The Times. Here’s what he says:

So far, it appears that all money market mutual funds save for one, The Reserve, have covered any losses so that investors don’t lose money.

The mutual fund industry’s main trade group issued a statement yesterday expressing confidence in the funds in general.

Money market accounts at banks are subject to F.D.I.C. insurance (and its limits). It is not yet clear whether their underlying investments are running into the same kind of trouble that The Reserve’s did. We’re reporting this out today and in coming days and will know more soon.