Questions and answers about the financial mess

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Courtesy of Chris Farrell, Minnesota Public Radio’s chief economics correspondent & Louis Johnston, economics professor, St. John’s University and the College of St. Benedict as heard on MPR’s Midday today.

Q: Is this the biggest financial crisis since the Great Depression?

A: Yes. We’re having a run on Wall Street, the worst run on financial institutions since the Depression, both guests say.

Q: Are we on the verge, then, of a Great Depression-style economic collapse?

A: No. The government has learned how to manage things properly.

Q: Is it possible the two remaining big investment banks will go under?

A: Goldman Sachs, Morgan Stanley are historic names. If they were to disappear it would shake the financial system to the core, according to Farrell. “I don’t think we’re going to see that, but I worry about the mutual fund industry.”

Q: Might the government nationalize the entire financial system?

A: Yes.

Q: What’s going to happen with corporate boards and executives? Will there be any accountability?

A: The big shots on Wall Street didn’t see it coming, Farrell says. Johnston says head of Lehman had most of his compensation in value of stock. “They made a lot on the way up but aren’t making much on the way out.”

Q: Is there any limit to how much the government has to put toward the bailouts?

A: Technically, the limit is how much the taxpayers want to shell out money to pay for them. When the government is looking to bail out a firm, Johnson says, it looks at whether the firm is insolvent (Lehman) or whether it has the assets to pay off creditors and debt (AIG).

Q: What interest rate is AIG paying for the government bailout?

A: As of today, about 11.75 percent.

Q: Should regulators have taken a bigger look at the financial industry after Enron collapsed?

A: Yes. “We took our eye off the ball” because of 9/11, the Afghanistan War, and the run-up to the Iraq war, according to Johnston.

Q: What about those of us baby boomers who don’t have “the long run” to wait for the market to return?

A: It comes back to where you have your money in the first place. Part of the pain from these risks is going to fall on those who are closer to retirement. For people who are broadly diversified (the Harvard Endowment fund is up 6%).. if you’re in your 70s, you should have gone for a more conservative portfolio. If retirement savings are more and more tied to something we can’t control (the market), we have to (a) save more and/or (b) work longer.

Q: What will be the next financial institution in trouble?

A: Washington Mutual (WaMu)

Q: Are people who have been saving religiously for retirement going to wake up one of these days and find out there is no retirement savings left?

A: No.

  • brian

    “the Harvard Endowment fund is up 6%”

    This is why everyone out there should fight to keep their traditional pension plan if they have one. Endowment funds and Pension Funds are much more able to ride out a bad market like this (and much more efficient at investing in general).

    (Full disclosure: I work at a consulting firm that would benefit from more companies having pensions.)

  • bsimon

    Bob, thanks for live-blogging.

    I wonder how the regulators avoid over-regulating in the traditional knee-jerk reaction to such calamity.