It is 1929, as you will read in this piece from NPR. A team of reporters from "This American Life" and "Planet Money" dug into a report that bankers have just handed a note to the US government reading "Your money or your life!" In other words, as NPR points out, the solutions to the current crisis may be even more painful than we'd imagined. Adam Davidson and Alex Blumberg report.
Adam Davidson: I am holding in my hand a piece of paper and, Alex, this has got to be one of the most surprising and illuminating documents of this whole crisis.
Alex Blumberg: Yes. It's a one-page research note from an economist at Deutsche Bank. It outlines in the clearest terms we've seen lately what kind of solution many bankers are looking for. It's basic message: we should forget trying to get a good deal for taxpayers. Even trying to do that will hurt. Let me quote my favorite sentence here: "Ultimately the taxpayer will be on the hook one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line." In other words, this paper says, if the government tries to save taxpayer money, a lot of us will lose our jobs and the whole economy will suffer. And it offers a solution any banker would love: "The government should estimate the highest price it can pay for various toxis assets on financial institutions' balance sheets -- and then buy them."
Adam Davidson: Another economist, MIT's Simon Johnson, wrote about this on his blog and he has a word for what this document is.
Simon Johnson: This is a robbery note! It's saying, "Guys, either you'll have 20% unemployment ... unless you buy toxic assets -- not for what they're worth, not for what the market price is, but for as much as you can pay.
Adam Davidson: The key line here is that the taxpayer will pay one way or another. I had a landlord -- I don't think he was in the mafia but he tried to cultivate the image! -- and he would say things like, "There's an easy way and there's a hard way!" I could just hear him saying, "You gonna pay one way or anudda." So basically what this note is saying is, "Look, guys. You're gonna hurt either way. Give us the money now and we'll try and make it easier for ya."
Simon Johnson: My first reaction was, "It's a spoof!" My second reaction was, "Oh-my-god!"
Adam Davidson: We figured Johnson should argue it out with a Deutsche Bank economist, Joe Lavorgna. [Sound of phone ringing.] "Hey, Joe. It's Adam Davidson from NPR. So I'm on the line with Simon Johnson. Your note today? Did you write it? Or you wrote it with your staff?"
Joe Lavorgna: Me. I wrote it. Yes, I wrote it.
Alex Blumberg: Johnson was actually really nervous about calling Lavorgna. He thought Lavorgna would get all mad at us for calling it a robbery note. But Lavorgna was cool.
Joe Lavorgna: I think the bottom line is simply that someone has to pay for the mess that's been created. There's no escaping the taxpayer's on the hook.
Alex Blumberg: Let me just say that Joe Lavorgna is finally coming out and saying something that every other bank -- and lots of government people -- have avoided saying. They've been playing this game about some magical recipe where the government bails out the banks, the banks do better, and the taxpayers end up making money -- everyone wins. And this note is saying that what we keep hearing from economists probably can't happen. Someone is going to lose. And Lavorgna is saying he knows exactly who that person is going to be.
Simon Johnson: I think, Joe, that it's refreshingly honest but it also kind of took my breath away. Reactions? I put it out there and asked people what they thought on on my blog. I didn't use names, I just put out this key paragraph you were just discussing and the key issue: the taxpayer will pay on way or another. So one guy said, paraphrasing how he read the note: "That sure is a nice global economy you've got there. Be a shame if anything happened to it!"
Alex Blumberg: And Joe, I've gotta say one thing about your note -- do you mind if we call it a ransom note? ...
Joe Lavorgna: [laughing] If I was on my own, I'd say fine. But I wouldn't say a ransom note. I would say a reality check. I think Simon is exactly right and this is the issue. We're delaying the pain but you gotta deal with the problem. I guess the issue is, just dealing with the problem with what we've done to this point is just simply not been aggressive enough. So whatever the approach is, let's just get there.
Alex Blumberg: Simon Johnson actually agrees with Lavorgna on one thing: the taxpayers are going to have to pay to get us out of this mess.
Adam Davidson: Johnson thinks if we're going to spend our money anyway, it's ridiculous to save the same bankers who caused this crisis. He likes a different approach where the government directly takes over banks and then sells them to new owners. Maybe for a profit. Maybe for a loss.
Alex Blumberg: I talked to a guy who has something to say to people who want to pin this whole thing on banks. I talked to David Beim at Columbia Business School. He's in his office showing me a graph showing how much debt we the citizens of America are in -- how much we all owe on our mortgages and credit cards compared to the economy as a whole, the GDP. For most of American history it was below 50%. And then...
David Beim: From 2000 to 2008, it goes like almost a hockey stick. It goes dramatically upward like a rocket. It's 100% of GDP. That is to say, currently consumers owe $13 trillion when the GDP is $13 trillion. That 100% of GDP owed by individuals. That is a ton.
Alex Blumberg: I'm going to ask you a leading question because I'm looking at the graph right now. Tell me, professor, has there ever been a time in history when we've owed that much before?
David Beim: I'm glad you asked me that. And guess what! The earlier peak way off on the left part of the chart is 100% of GDP in 1929. This is a map of twin peaks. One in 1929. One in 2007.
Alex Blumberg: Does that chart scare you?
David Beim: Yes! That chart is the most striking piece of evidence I have that what is happening to us is something that goes way beyond toxic assets in banks. It's something that has little to do with the mechanics of mortgage securitization or ethics on Wall Street or anything else. It says the problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us. We have overborrowed. We've been living very high on the hog. Our standard of living has been rising dramatically in the last 25 years and we have been borrowing much of the money needed to make that prosperity happen.
Alex Blumberg: In other words, the problem the banks are facing is the problem we as a society are facing. We all have too much debt. Getting rid of it is going to be painful.
Adam Davidson: The thing I got from talking to all these people is if you want a solution in which the most guilty people pay the most and the innocent don't have to pay anything, well, that's just not going to happen.
Alex Blumberg: Yes, it seems like we're way past that. We are going to spend a lot of money. We might bail out some banks that some wish we wouldn't. There isn't some magical solution where we get out of this mess without any pain.
Adam Davidson: And while they may disagree on who will bear the brunt of that pain, all the experts we talked to say the longer we wait the worse it will be for all of us.
