Listen: The Wall Street roller-coaster.

MPR's Gary Eichten interviews Louis Johnston, an economics professor at St. John's University and the College of St. Benedict, to discuss the tumultuous economy. Eichten also talks to MPR’s chief economics correspondent Chris Farrell to analyze the situation.


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KERRI MILLER: Mr. Eichten, what's on your mind today for midday?

GARY EICHTEN: Well, first hour, Kerri, we're going to talk economy. Looks like there's going to be an economic stimulus package, although there's still lots of work to be done on that. But we'll catch up on all the latest economic news first hour. And then over the noon hour, we're going to hear from former Secretary of State Madeleine Albright, who's out with an interesting new book. This one offers some advice to whoever is elected president in November, talking about some of the daunting challenges they will face.

LAKSHMI SINGH: From NPR News in Washington, I'm Lakshmi Singh. Congress has a bipartisan deal designed to stave off a recession-- tax rebates of $300 to $1,200 to poor and middle class households, as well as business tax cuts. But the agreement reached today between House Speaker Nancy Pelosi and Republican leader John Boehner is tentative. They're seeking the endorsement of key members of their parties.

President Bush and Congress have been rushing to re-energize the economy, which earlier this week saw stock prices plunged more than 400 points and spurred an interest rate cut of 3/4 of a percent. European stock markets ended trading today sharply higher. Frank Browning has this from Paris.

FRANK BROWNING: Yesterday and today are being described as the two most turbulent days on European stock markets since the turn of the century. Just as Wednesday saw the steepest declines across Europe, today, the markets enjoyed their sharpest advances since 2003. The Dow Jones STOXX 600 showed the London market surged 4.8%. Paris's CAC 40 rose 4.9%. And Frankfurt's DAX, 6.2%.

Most of today's investor optimism is being attributed to action by New York regulators to prepare for a rescue of bond insurers. Many major bond houses continue to face huge losses and liabilities from the subprime lending catastrophe. Report that China's domestic growth exceeded 11% in the last quarter of last year also reassured investors worried about the global economy. For NPR news, I'm Frank Browning in Paris.

LAKSHMI SINGH: Ford is offering 54,000 of its hourly workers in the US buyouts and early retirement packages. The automaker's CEO, Alan Mulally, says the United Auto Workers Union agreed to the cost-cutting measures. He says Ford will begin with employees at already closed plants in Georgia, New Jersey, Missouri, and Virginia. There's been another deadly attack in Mosul at the site of yesterday's bombing that killed dozens of people. Authorities say a suicide bomber attacked police officers today, killing at least three people, including a senior official. Details from NPR's Graham Smith in Baghdad.

GRAHAM SMITH: A suicide bomber wearing an Iraqi police uniform today attacked the provincial director of police as he was inspecting damage from yesterday's massive explosion. According to police sources, as the man approached the brigadier general, bodyguard suspecting an attack fired on the man. Still, he rushed towards the general and managed to trigger the explosives he had strapped to his body.

According to the US military, the bomber succeeded in killing the general and two of his aides. The attack wounded several other policemen, as well as an Iraqi soldier and an American soldier. Authorities immediately imposed an emergency curfew on the city of Mosul. Yesterday's explosion collapsed an apartment building police snipers were using to target insurgents. The blast also destroyed 15 nearby houses. Graham Smith, NPR News, Baghdad.

LAKSHMI SINGH: Dow is up 54 points at 12,324. This is NPR News.

SPEAKER 1: Support for news comes from, where you can choose from up to four customized loan offers. 1-800-553-TREE. When banks compete, you win.

GRETA CUNNINGHAM: From Minnesota Public Radio News, I'm Greta Cunningham. Governor Pawlenty wants the price of the central corridor light rail line pared back to about $840 million. Pawlenty says if the price is not cut, he may withdraw his support for the light rail project. The proposed LRT line would connect the downtowns of Minneapolis and St. Paul.

Pawlenty has written the main players, saying the $70 million recommendation he gave the project in his bonding bill could easily be transferred to other important projects. Pawlenty's letter went to the mayors of Minneapolis and St. Paul and to the heads of the University of Minnesota and the Ramsey and Hennepin county boards. Students, faculty, and staff at St. Cloud State University will take part in a forum on racism today. The SCSU campus has been the site of several racist incidents recently. Minnesota Public Radio's Tim Post reports.

TIM POST: The three hour forum will feature an address from St. Cloud State University President Earl Potter, a panel discussion on racism, and several performances by musicians and poets. Organizers hope the event encourages students and faculty to speak out against bias on campus and racist graffiti that has plagued the University since late last year. More than a dozen swastikas have been found scrawled in public places on campus, most recently less than a month ago.

Both St. Cloud State University and a local community group have offered rewards for any information that helps find those responsible for the racist graffiti. Tim Post, Minnesota Public Radio News, St. Cloud.

GRETA CUNNINGHAM: Sunshine around the region today with high temperatures ranging from 10 above in the east to near 15 in the west, it will be clear tonight with some clouds later on. Low temperatures tonight from 10 below in the Arrowhead to near 5 above 0 in the southwest. Now in Duluth, it's clear and 4 below 0. In the Twin Cities, report of clear skies and a temperature of 6 below zero. From Minnesota Public Radio News, I'm Greta Cunningham.

GARY EICHTEN: Thanks, Greta. Six minutes past 11:00. And we bid you a good morning and welcome you to midday on Minnesota Public Radio News. I'm Gary Eichten.


SPEAKER 2: (SINGING) Happy days are here again

The sky--

GARY EICHTEN: Well, all right, happy days, maybe a little too irrationally exuberant. But today is certainly a lot better than Tuesday was when the stock market collapsed and hands were heard ringing all around the world. Turns out the US economy might be all right after all. After the wild ride on Wall Street that led to sharp drops on markets around the world and after this week's dramatic action by the Federal Reserve, the economic news is a little cheerier today as we come to the end of the week.

The stock market has rallied pretty stable today. And apparently, Democrats and Republicans are close to an agreement in Washington on an economic stimulus package that supporters say will prop up the economy for the rest of the year. But there are still lots of problems to stew about, no doubt about it. A possible recession, looming inflation, the housing crisis, rising unemployment.

During this hour of midday, we're going to focus on the economy. Joining us this morning from Collegeville is Louis Johnston, economics professor at Saint John's University and the College of Saint Benedict. Chris Farrell will also be joining us later this hour. But in the meantime, if you have a question or a comment for Louis about the economy, give us a call. 651-227-6000. 651-227-6000.

Toll free number, 1-800-242-2828. Or you can send in your question or comment online. Go to our website and click on Send a Question. Louis Johnston, welcome back to midday. Good talking with you again.

LOUIS JOHNSTON: Good morning, Gary.

GARY EICHTEN: Is the worst over? Has the crisis passed?

LOUIS JOHNSTON: Well, as we always say, we can't tell.


That's the economist's standard answer. It may be. It may not be. We just don't know yet. No, but to be serious, it looks like the worst of the financial crisis has passed. That doesn't mean that the economy is out of the woods or anything. But the Federal Reserve did what people who follow the Federal Reserve and other central banks say they ought to do, which is make sure that the financial system doesn't melt down.

That is, make sure the financial system doesn't get so messed up that people who need to borrow can't borrow, and people who want to lend can't lend. I think they've at least dealt with that on a day-to-day basis. That isn't going to be a problem. The question now is, What are some of the more medium- and long-term things that we need to do to make sure that this problem is actually solved?

GARY EICHTEN: Well, how did we end up with this problem, Louis? I mean, things-- what changed all of a sudden to set everything into panic mode?

LOUIS JOHNSTON: Well, I'm asking myself that question because we talked back in August about some of the things that were going on in the financial markets. And if you're just completely emotionless and just look at the data, nothing really has changed much since August. Unemployment, as you mentioned, has been rising a bit. GDP growth was strong in the third quarter but is expected to be a lot slower in the fourth. And the retail sales from the Christmas season are an indication of that.

Something happened in the last few weeks where people suddenly started to realize what had happened in the fall. My guess is part of it is the size of the losses that institutions like Citibank and Merrill Lynch were reporting. $10 billion is a lot of money. Even to economy like ours, that's a lot of money. And I think people finally realized, wait a second, something really happened back in the fall when those financial markets started to seize up.

And the term some people use is there was a tipping point. Enough people finally realized what was going on, that they started to take action. Now, the problem that I see is that there is a complete overreaction over the last week or two that instead of saying, oh, look, this is happening, all of a sudden, people started to not necessarily panic, but terribly overreact.

And one of these situations, a financial crisis like this is as much psychological as economic. You have to deal with the fact that people, whether it's rational or not, believe that something's going to happen. And you have to change their minds about that. Otherwise, they'll have a self-fulfilling prophecy. They'll make it happen.

GARY EICHTEN: Federal Reserve get the credit then in your mind, Louis, for stabilizing things this week with the dramatic rate cut?

LOUIS JOHNSTON: I think so. I've been talking to some colleagues about this. This is an example of an economic idea that actually started bubbling up in the University of Chicago and the University of Minnesota in the 1970s that the only way for a government agency like the Federal Reserve to have a dramatic effect on the economy when it's in a downturn or in a crisis like this, is to do something unexpected.

Because if you do something that people expect, well, they've already factored it into their plans. And it's not going to change anything. You have to do something that is dramatic and unexpected. Well, they did it. Bernanke on Tuesday did something that the financial markets were not anticipating. And it was in a direction that was helpful. And so, yeah, I think at least for the short term, they get the credit.

GARY EICHTEN: Will they get more credit next week? And that is to say, Are they going to cut rates again next week when they meet?

LOUIS JOHNSTON: Well, that's where that expected versus unexpected comes in. The market didn't expect what happened on Tuesday. But I think now looking at the futures markets that people do for betting what the Fed's going to do, they've factored in there that, yes, the Fed's going to cut probably another 50 basis points or half a percent off the interest rate. If they wanted to have a dramatic effect, again, they'd have to do it bigger than what the markets are betting.

GARY EICHTEN: Now, meanwhile, in Washington, the Democrats and Republicans apparently are pretty close to a deal on an economic stimulus package. Basic outline here, we're told, would be that everybody who earned at least $3,000 last year would get a tax rebate of at least $300. Plus, you get more for each child that you have. $70 billion in tax breaks for businesses of one sort or another. Assuming that information is more or less accurate, will that have any significant impact on the economy?

LOUIS JOHNSTON: Well, it can't hurt in the sense that, yeah, putting money in some people's pockets would probably increase the spending level more than it would otherwise have been. But I don't think it's really a very good plan the way it stands. It doesn't deal with the underlying problems that got us into this mess in the first place, which is that we've got a whole segment of the population that needed to go into the subprime mortgage market to purchase houses.

And one of the big reasons they were in that market to begin with was because their incomes have stagnated or fallen. And so we've got to deal with that problem. We have to deal with the fact that the lending standards among banks and mortgage originators and so on need to be cleaned up and made transparent so that people can actually trust those things. This package does nothing for that. So I'm frankly kind of hopeful that if this does get passed, that it's as simple and as short as possible so it can't do any harm.

GARY EICHTEN: So your real concern is that it might actually do some damage?

LOUIS JOHNSTON: Well, I don't think it will do any damage in the sense that, OK, we pump another $150 billion into the economy, and maybe that causes the budget deficit to go up a little bit. I don't think it can hurt, but it's taking some medicine that really isn't going to affect your headache or something like that. It's maybe even a placebo.

GARY EICHTEN: The plan, we're told, will not include an extension of unemployment benefits nor an increase in food stamp payments of any sort. Now, politically, that's going to be quite controversial, apparently. But in terms of an economic stimulus package, serious omission?

LOUIS JOHNSTON: It really doesn't matter in terms of the stimulus itself. It does, again, come back, though, to the longer term problem, which is, What are these people who are in the, say, the bottom 40% of the income distribution and have seen their incomes go down over the last six years in real terms, how are they going to make it? This stimulus package really doesn't do anything. It says here, here's a check for $300 or $400 or $500, $600 and spend it whatever way you want.

But you're still dealing with health care costs going up. And you might still be facing losing your job to foreign competition or something. And it really doesn't deal with that. Another concern that I've got in here that's not being addressed by this is that one of the first places to see a downturn show up is in state and local tax revenues. So, for example, we saw the Minnesota Tax Report come out this fall, the forecast in November, showing that instead of having a budget surplus, we're looking at a budget deficit because our tax revenues are forecast to fall by a lot.

Well, nothing in this is going to help that. And so that's going to act as a drag on the economy. If the state is getting less in tax revenues and it turns around and cuts its spending because of that, that's going to withdraw economic activity and make things worse. And so I'd like to see some plan where the federal government would help out states and localities with their financial troubles.

GARY EICHTEN: We're talking this hour about the state of the economy. As we noted at the beginning of the program, as we come to the end of the week now, things sure seem a lot more stable and optimistic than they did at the beginning of the week. But there are still many, many concerns that people have-- recession, inflation, unemployment, housing, you name it.

And that's our focus this hour to take a look at where we stand as we come to the end of this week, whether this economic stimulus package that's being worked out in Washington, whether that'll do any good. Joining us by phone from Collegeville, Louis Johnston, who teaches economics at Saint John's and the College of Saint Benedict. And joining us now in studio, Chris Farrell, our chief economics correspondent.

You hear him regularly on our Marketplace and Morning Edition programs and also a regular guest here on midday. Love to have you join our conversation. 651-227-6000. 651-227-6000. Toll free number, 1-800-242-2828. Or you can send in your question or comment online. Go to our website and click on Send a Question. Chris, welcome to midday.

CHRIS FARRELL: Thank you for having me.



CHRIS FARRELL: That wasn't me.

GARY EICHTEN: I'm going to ask you the same couple of questions I asked Louis before we get to listener calls here. Do you think the worst is over now? Is everything settled down?

CHRIS FARRELL: No, absolutely not. And that's not the way markets work. The stock market is down about 16% from its October high. And we get a little bit of a couple up days, a couple of bargain hunters going in there. But I would thoroughly expect some more bad news to roil the markets. And we're at that period of time where we're really trying to figure out, How bad is this going to be? What's the depth of the recession?

The Fed has cut its benchmark interest rate. Do we really have to worry about inflation or not. I thoroughly expect the next time the Fed cuts its benchmark rate, everyone's going to all of a sudden go, hey, wait a second. Last week, I said inflation is not a problem, but they just cut their benchmark into-- maybe inflation is a problem. And when that hits the market, I would expect it to go lower.

GARY EICHTEN: OK. And the economic stimulus package being worked out in Washington, is that the answer to this immediate problem?

CHRIS FARRELL: I think the thing on the economic stimulus package, the right way to look at it is, it's political insurance with a little bit of economic insurance wrapped in there, a little kind of rider. It won't do a great deal of harm. It won't do a great deal of good. For political reasons, it's going to happen. It's amazing how the downturn in the economy has really concentrated the minds in Washington.

All of a sudden, bipartisanship, which we haven't seen in a long period of time, seems to be alive and well. But I see no reason why the classic criticism of fiscal stimulus in the post World War II period has been. It's too little, too late. And that's why we rely on monetary policy, the Federal Reserve, to cut its benchmark interest rate and to take some dramatic actions to help the economy out. Because on the fiscal side, the tax and spending side takes so long to happen. And I don't see anything in this particular package that's going to change that judgment.

GARY EICHTEN: Louis was saying that in his mind, to the extent anybody should get a pat on the back, it should be the Federal Reserve. True?

CHRIS FARRELL: Yes. Although, if we were carrying on this conversation in a Wall Street trading room, they would not be saying "pat on the back" to the Federal Reserve. They'd probably be hitting him on the side of the head because they're a little bit frustrated with him and frustrated with policy. I think he's getting a bad rap. I think that by and large, the Federal Reserve has been pretty straightforward. And yes, he did take dramatic action. And it worked, because if you go back earlier in the week and while we were enjoying and rightfully celebrating the Martin Luther King holiday, there was close to a global financial panic around the world.

GARY EICHTEN: Well, let's get some listeners involved here. We're talking the state of the economy with Chris Farrell and Louis Johnston. And, Neal, your question, please?

NEAL: Good morning, gentlemen.

GARY EICHTEN: Good morning.

NEAL: First of all, I'd like to ask, Where is this money coming from? Because if we're in debt, we're just going to go farther in debt. And here's my other question. Rand Paul seems like he's the only one that's talking any sense as far as running. And he don't get the light of day. But he says, first of all, what we should do is start cutting foreign aid and start bringing these troops all over the world back home.

And then isn't this all because of no politician out there has an energy policy? Because this is why we're in this recession. Everything revolves around energy. And if you guys would address them a couple of questions. Thanks.

GARY EICHTEN: All right. Louis, is the money to pay for the economic stimulus, where's that coming from?

LOUIS JOHNSTON: It's borrowing. He is right about that. So we're not going to raise taxes to cut taxes in some other way. We're literally just going to have to borrow it. I don't think it's that big a deal in the sense, though, that the amount we're talking about compared to, say, the amount of debt we already hold just isn't that big. So that money is coming just from borrowing.

GARY EICHTEN: Now, our caller says the root of the problem is our lack of a coherent energy policy. That we're too dependent on others for our energy. Would you agree?

LOUIS JOHNSTON: No, not in the sense of being too dependent on others for our energy. I think the idea that we don't have an energy policy actually has merit. We've basically just put all our eggs into one basket. And when the price of that particular fuel, oil in most cases, goes way up, we're at its mercy. And so usually, what economists, and Chris will say this about financial markets, I'm sure, too, is the diversify, diversify, diversify. You should always have whatever you're doing diversified so that if one thing goes bad, you've got something else to pick it up. And the same is true in energy policy.


CHRIS FARRELL: Yeah. I mean, I think energy policy is important. And as Louis said, we don't have an energy policy, or we need a better energy policy. But if we're looking at this particular downturn, what is it that's really been going on the past couple of years? And what makes this unusual? I think what's coming home to roost is a lot of borrowing and spending.

And it started out in the subprime area. And we talked about the subprime crisis. And then it kind of merged into the housing market. And now it's spread throughout the housing market. And then if you look at what's going on with default rates with auto loans, default rates on credit cards, default rates on student loans that we're really having an era, a period of time where credit was really cheap, where as long as you could breathe, you could get a loan. A lot of times you didn't even have to document that you had an income. You still would get a loan.

GARY EICHTEN: I was going to say it. I thought you were going to say you didn't even have to breathe, but I--


CHRIS FARRELL: You still got to be able to sign it.


CHRIS FARRELL: So you still got to do that. And what is happening is all of a sudden, the financial system goes, well, wait a second, the household is in real financial trouble. And the household is going, you know, my home, which was bailing me out previously, because I could borrow against the home or refinance it, that's no longer working. And so we have a financial crisis that's concentrated in the household. And it's not energy, but that household is feeling the pinch of higher energy prices.

GARY EICHTEN: So in your mind, Chris, the problem here is with the individual, with the consumer, not the level of government debt and the government's--

CHRIS FARRELL: The problem is not with the individual. The problem is with the financial institutions that were just shoveling money at the individual. Look, most people are going to borrow, all right? We're going to borrow. But their money was being shoveled at them. And the people who are shoveling the money at them, the sort of Gilded Age folks, they knew better.

A lot of them knew a lot better. And by the way, yes, they've lost their job, but they've walked away with millions and millions of dollars in compensation at the same time. So, no, I don't think this is a problem of the ordinary folk. I mean, look, we're raised to want to own a home. I mean, that's just part of our culture. And then all of a sudden, a lot of young people had the opportunity, didn't have much income, they didn't have much savings. They could buy a home. All right, so they took advantage of it.

I think that the responsibility lies with the financial institutions more so than the individuals. There were some individuals, of course-- of course. But I would put it at the financial institutions, all of whom have MBAs, all of whom made millions of dollars, all of whom are highly educated, all of whom should have known better.

GARY EICHTEN: Louis, interesting report out of Davos, Switzerland, this morning. Reporter on the line on National Public Radio was saying there seems to be a consensus among the economic gurus gathered at the World Economic Summit in Davos that the central bankers, the people who are setting economic policy in the west, the United states, Europe, they don't know what they're doing anymore. That they've lost control. Is that a widely held belief?

LOUIS JOHNSTON: I don't believe it is. I giggled there for a moment because the governor of the Central Bank of England and Ben Bernanke and the governor of Bank of Israel and a lot of them now are economists. And so one way to put that point is the bankers aren't in charge anymore. The economists are in charge. And the economists don't know anything. So maybe I should take umbrage at that.

But there's a perception-- and Chris touched on it. There's a perception among the people on Wall Street, in the financial markets that Bernanke and the other central bankers are not doing the right thing. Well, I think what's happening, at least this is from my perspective, he is doing the right thing, but he's not doing what they want. He's not bailing them out. He's not making it easier for them to get over these problems.

He's making sure that the markets work for the benefit of the economy as a whole, not for the benefit necessarily just of Wall Street. And in retrospect, it's easy to criticize, but it's clear that one of the things that Alan Greenspan did, especially in the latter part of his terms at the Federal Reserve as chair, was he tended to lean that way. He would make interest. He had what was sometimes called the Greenspan put the idea that if the financial markets did something that overreached and maybe caused the problem.

Well, he'd help them out. He'd have their back. Well, Wernicke's not doing that. And the other central bankers in the European Union and in Bank of Japan, they're not doing that either. They're looking out for the system as a whole. And that's kind of hard for some people to swallow, I think.

GARY EICHTEN: Linda, your question, please? Linda?

LINDA: Explain to me the logic. If our problem is borrowing and spending, and the federal government's answer is to give us more money in the form of tax credits, so we spend it again, I don't understand the logic of the problem and their answer to it. I'll take my answer off the air.


CHRIS FARRELL: I think it's a really good question. And I think a lot of people shared the sentiment. OK, so we get some money from a helicopter-- excuse me, the IRS. And at the same time, we add to our debt. A couple of quick answers. One is we're talking about fairly small numbers. It may not be a great thing to do, but we are talking about fairly small numbers. What? $150 billion in an $11 trillion economy. So fairly small in that sense.

What the government is trying to do is just get economic activity more normal. OK, we talk about spending and borrowing, but it's really about trying to get people to sort of they can be more conservative, they can be a little more wary. Individuals may not borrow as much, but trying to get the grease, the wheels of commerce. What is also the reality, by the way, and I think this is going to turn out to be very true about this if we do get these rebates, which are what? $300 to $1,200. That seems to be the range that's being talked about.

The last time we got rebates was in 2001. And it looks like a fair amount of that money went to pay down debt, not to go buy a flat panel screen TV. The suspicion is this time around, with households even more extended after this borrowing boom that we've been going through, and as assets are written down, the values of homes are written down, the values of cars are written down, a number of assets that what people are going to do, if you get $500, you're going to say, hey, you know, I think I better put that toward my credit card debt.

And it will not have a very strong economic impact that way. It will a nice impact on your-- not you, Gary. I'm looking at you, but have a nice impact on whomever is paying down their credit card debt. It doesn't actually help the overall economy a great deal.

GARY EICHTEN: Do you agree with that, Louis? I ask that because the state economist, Tom Stinson, was on the other day. And he said, well, no, it does make a difference.

LOUIS JOHNSTON: Well, it doesn't help in the sense of stimulating the economy and trying to speed up the growth rate of GDP, of how much people are spending. But it does affect people's balance sheets, that is their balance between assets and liabilities. If they can pay down some of their debt, that puts them in a better position to either borrow later on or to spend their money now on goods and services, rather than having to put it into a mortgage payment or a credit card payment or something.

But that's what I've been wondering about with this stimulus package. And I don't know if Chris has any thoughts on this, but in a sense, what this stimulus package might end up being is government, in a sense, assuming some of the debt that the households already have taken out and making it safe for consumers to spend again, by, in a sense, transferring their debt onto the government's books.

CHRIS FARRELL: I think Louis is right. However, I would say, B, it's more that, yeah, the government is going to absorb some of the costs of paying down the consumer debt, which is, by the way, a long-term process. What is a little bit different, I think, about this time around is because of the home equity loans and the levels of credit card debt and the auto loans and the cheapness of credit that we've been going through, we may come out of the recession, but we're still going to be continuing to pay down that debt over a period of time.

So this is going to be a little bit like paying down that-- improving that balance sheet over a long period of time as opposed to the way we normally look at a post-World War II recession, which is downturn, Fed cuts, get some fiscal stimulus in there, let's come roaring out, stock market's up 12%, 20%, and we move on ahead.

GARY EICHTEN: Quick question before we break for news for both of you. Let's assume for a moment that these short-term measures work, things kind of get back to where they were before. Are all the problems, economic problems facing the nation then solved? Chris?

CHRIS FARRELL: No. And one big problem will not be solved. It will take time, which is the housing market. Prices are continuing to go lower. Secondly, balance sheets, as Louis was saying, it's going to take time to restore those balance sheets. And the third thing is the middle class squeeze is not going to disappear just because we get the economy going again. I think that's one of the lessons of this recent boom and bust.


LOUIS JOHNSTON: Well, I think Chris nailed it, those three things. And the one thing I'd add in the housing market is that we both have to deal with the fact that people's houses are going down in value. We also have to deal with the fact that there's a huge overhang of newly-built houses that are waiting to be bought. And so you've got both of those problems lingering out there.

GARY EICHTEN: Talking about the state of the economy this first hour of our mid-day program, it looks like an economic stimulus package will be agreed to in Washington. Meanwhile, markets have stabilized for the most part. So where does that leave us? Well, that's what we're talking about this hour. Louis Johnston is with us. He teaches economics at Saint John's University in the College of Saint Benedict. Chris Farrell is our chief economics correspondent.

And again, if you would like to join our conversation, 651-227-6000. 651-227-6000. Toll free number, 1-800-242-2828. Or send in your question or comment online. Go to our website and click on Send a Question. And we'll get to more of your questions here. We'll continue our conversation in a couple of minutes.

KERRI MILLER: Programming is supported by the College of St. Scholastica, offering undergraduate and graduate education for working adults in Saint Paul, Rochester, St. Cloud, Brainerd, and Duluth. Election season has arrived with a vengeance. With so many candidates, how can you keep track of who's saying what and which candidate truly represents your ideals? Well, Minnesota Public Radio news can help.

Just go to Click on Select a Candidate, answer some questions about the major issues, and then see which candidates most closely reflect your views. Get the tools you need to stay informed and have some fun at the same time all at

GARY EICHTEN: Check it out. It really is interesting and informative feature on our website. Select a Candidate at Now let's catch up on some headlines. Here's Steven John. Steven.

STEVEN JOHN: Thank you, Gary. As you've been discussing, congressional leaders have reached a tentative deal on an economic stimulus plan containing tax rebates of between $300 and $1,200 per household. The plan also includes tax cuts for businesses. Officials want key members of each party to sign off on the deal before making an official announcement.

Stocks are fluctuating on Wall Street after a rise in early trading this morning. Investors absorbed bad news about bond insurers, but also saw a report showing that unemployment claims fell for the fourth week in a row. Sales of single-family homes in the US are down, dropping last year by 13%, the largest amount in 25 years. The median price for single-family homes fell 1.8%. It's the first time in four decades that the median price has fallen for an entire year.

An Iraqi police chief and two other officers are dead following a suicide attack at the site of yesterday's blast that killed at least 34 people in Mosul. The US military is blaming al-Qaeda in Iraq for today's blast. Yesterday's bombing that collapsed a three story apartment building is still under investigation. A grand jury has issued an indictment against a marine corporal suspected of killing a pregnant comrade.

Authorities still believe Cesar Laurean fled to his native Mexico. Prosecutors say they won't seek the death penalty, but only if he's arrested there. A Faribault High School hockey player is recovering after his heart apparently stopped beating briefly when he was hit by a puck during a game. Alex Larson is in stable condition at Saint Mary's Hospital in Rochester. The boy's parents say his heart was bruised from the impact of the puck, but sustained no permanent damage.

Doctors say a newborn is expected to survive after oxygen ignited inside a special hood he was wearing at Mercy Hospital in Coon Rapids and fire burned nearly a fifth of his body. The boy named Maverick was burned on his head, shoulders, part of his face and the tops of his hands and is in critical but stable condition.

Skies should be mainly sunny across Minnesota today. Some snow showers in the far Northwest. Highs near 10 in the East to the mid teens in the West. Currently, heavy snow in Warroad with 0 degrees. Austin, sunny and 8 below. Twin Cities, Gary, sunny and minus 4.

GARY EICHTEN: I think we can blame you, Steven, for this run of cold weather, actually.

STEVEN JOHN: I had nothing to do with it.


LOUIS JOHNSTON: But it's supposed to come to an end by the weekend.

GARY EICHTEN: OK. Thanks a lot, Steven. 25 minutes before 12:00. Over the noon hour, by the way. I don't know who's going to be the president, the new president, but Madeleine Albright will be on the air this noon with some advice for whoever he or she is, whoever gets elected in November. Albright argues-- of course, she's a former Secretary of State. She argues that, boy, the next president is going to face some daunting challenges, no question about it.

But there are preferred ways to deal with those problems. And you'll hear her analysis over the noon hour this hour, talking the state of the economy with our distinguished economic advisors, Chris Farrell and Louis Johnston. Chris is our chief economics correspondent. Louis teaches economics at Saint John's and Saint Ben's. And again, if you'd like to join our conversation, 651-227-6000. 651-227-6000.

Toll free number, 1-800-242-2828. Or you can use our online service at When you get there, click on Send a Question. Louis, no question about it, people who are facing foreclosure on their homes or sharp increases, spikes and so on in their mortgage rates have really been whacked the last year or so. And now apparently, the politicians have agreed on a plan whereby Fannie Mae and Freddie Mac can take over or underwrite loans for a lot higher mortgages, bigger mortgages than they could in the past. Is that going to make any significant difference to the average Joe and Jane?

LOUIS JOHNSTON: Well, it might in the sense that people who either need to refinance their houses or who are out there and couldn't get a loan, even though they probably were creditworthy because of all the gyrations going on in the markets, that'll probably help some. But it probably isn't going to help the people that you just described very much. If you are in an adjustable rate mortgage and you've had the interest rates go up on you, or if you've already been foreclosed on, in a sense, the horse has already left the barn.

And you've got to come up with something else. And again, that's disappointing to me that either at the federal or the state level, there really hasn't been anything done to address that part of the problem.


CHRIS FARRELL: I think a couple of things are going on. One just really struck in the past couple of days with the cut by the Federal Reserve, how many emails I've gotten about, Is now the time to refinance my mortgage? And we're talking about people who have 6.5% mortgages. Now, the 30-year fixed rate mortgage is about 5.7%. Looks like it's heading lower. So we are going to get a little bit of support in that way. And people aren't saying refinance my mortgage to take money out.

They're just saying refinance my mortgage to be in a more conservative position. So that's one thing. And I think-- so there, the Fed easing may have somewhat of an impact on the housing market. The other thing, what's really happening here is the lenders love to lend mortgages, $417,000 and less, because those are the mortgages that Freddie Mac and Fannie Mae package and sell on Wall Street.

Now, what we're talking about, if this change goes through, is it could be up to mortgages depending on your metropolitan area, up to $700,000. So it will have somewhat of an impact in making mortgage money more available. And it might even-- some of the tightening of the credit scoring, that horrible thing-- it used to be if you were like a 630, you were considered a good credit. Now you have to be around 680 to be a good credit.

Well, as Fannie Mae and Freddie Mac loosen up these rules and you get a little more refinancings going on, and there's just more generous terms, I wouldn't be the least bit surprised. So we saw a little bit of relaxation on the credit scoring front.

GARY EICHTEN: Back to the phones. Pete, your question, please?

PETE: Yeah. My question goes back to the construction industry. And I don't think that's done and over with yet. I don't think the subprime is everything that has been going wrong there. I work in that industry, and I see when I talk to people in the corporate side now, that seems to be slowing down now too, at least in the design part.

And to me, that means three, four months from now, those projects are going to be done. And there's going to be nothing in the pipe. So I don't think this is over by any means. And I think part of it's credit, part of it's the general business environment. But I'm just wondering what your guests think about that.


CHRIS FARRELL: Oh, I think he's absolutely right. What he's talking about is we've had a downturn, obviously, in the housing market. We've talked about that a lot. And now we're seeing signs of trouble coming into the commercial market. And commercial real estate values are coming down. There's a couple of shopping malls that have gotten into trouble. There are a couple of real estate investment trusts, which is a way individual investors can invest in commercial property.

They're not doing very well. And there's a widespread expectation. I think it's a very reasonable expectation that as the economy slows down, the trouble that has been going on, and largely concentrated in the residential side of real estate, is now moving to the commercial side of real estate. So the construction industry is going to be a tough time period. There's no question about it.

So then you look at, What could offset that? Right? Because construction is going down, maybe some other things. So people looking at really-- frankly, I think they're looking at two sectors, maybe three-- exports. But then again, will China continued to grow? Will India continue to grow? But exports won't support for our economy, health care? Because if you look at our economy, where the job growth has been, it's been in two areas-- health care and government.

So right now people are saying, OK, construction is going down, real estate is going down. Will exports be enough to at least offset some of that downward momentum? How about health care, job growth, and how about government?

GARY EICHTEN: Louis, what about this globalization business? Now, weren't we told, or weren't we led to believe that we have now a global economy? So if you have some problems, say, here in the US, not to worry too much because your Chinas and your Indias and your Europes will pick up the slack. And then if they have some problems, we'll pick up the slack, and all those peaks and valleys will be evened out.

LOUIS JOHNSTON: Well, not strictly that way. And let's think about what you just said, that if there's a downturn in one place, it'll be picked up by the other. So there were going to be downturns in different regions. The question is, if you looked at the world as a whole, Could the whole world, say, go into a recession, or even worse, a depression?

But that's one of those things that's very frustrating for economists because when we talk about globalization and economic integration, it's the same old story. On the one hand, yes, there are tremendous benefits. But on the other hand, you don't get more benefits without increased risks in some ways. So that not only can problems in the US spill over to the rest of the world, but problems in the rest of the world can spill over to us. We're interdependent.

And so, no, it doesn't necessarily make things smoother over the course of the business cycle. The idea, at least in theory, and I think you would argue in practice over the last 50 years, is that greater integration and greater trade leads to higher levels of economic growth and higher levels of standards of living for people on average-- not everybody by any means, but on average for the world and for most areas of the world.

But no, it's not going to calm you down by any means. In fact, that's one of the things that's concerned about the Federal Reserve cut the other day was that I would have preferred to see all the central banks coordinate and lower the interest rate together. But right now, the European Central Bank has said, we're not cutting and we're not going to do anything. And the Bank of Japan has remained silent. And so I think things would be a little bit more calm and would help the financial markets if we actually did have some coordination like that.


CHRIS FARRELL: Well, when you think about economists and Wall Street money managers, what? The quadratic equations, the price earnings ratio, but at their core, what economists and Wall Street money managers and investors are, they're novelists. They write novels. They tell tales. They have narratives that make sense of this world. So up until last weekend, the narrative that was being discussed is exactly what you're talking about.

OK, so we got the US is no longer the 800-pound gorilla of the global economy. The US goes down into a recession, the rest of the world's going to continue to grow. And we're going to call our novel decoupling. We're decoupled from the rest of the world. Then over the weekend, everyone started talking to each other, going, You know what? That's really nonsense because the US really is going into recession, or it's going to be awfully close to recession.

And you know what? Those exports from India are going to decline. Those exports from China, they're going to decline. The US is still the 800-pound gorilla of the global economy. Oh, no. And a new narrative, a new tale, a new story started to emerge, which is that we're going to go into recession together. It's a kumbaya moment.


GARY EICHTEN: Holding hands, going up and--

LOUIS JOHNSTON: Do you want to start singing, Chris, or do--

GARY EICHTEN: Holding hands, going down. Carol, your question, please? Carol, you go ahead.

CAROL: With the tremendous drop in interest rates and no rebates, it would seem that seniors are going to be taking an inordinate blow on this particular fix, or am I just being a whiner? [LAUGHS]


CHRIS FARRELL: No, you're not being a whiner at all. I mean, I think that the real question will be, and, boy, it's the discussion that we'll be having over the next couple of weeks, what will protect the seniors is if the Fed is right that inflation is not a problem. Because if you have a slow-growth economy or a recessionary economy and you have inflation and then seniors who typically have more savings, the value of those savings goes way down.

So right now, we're at a period of time, I think, between borrowers and savers is probably equal-- who's going to benefit, who's not going to benefit? But what I'd be watching very closely, and I think is a very important question is, What happens to inflation over the next several months?

GARY EICHTEN: Chris, or Louis, just in terms of pure economic stimulus, if you were to put $300 in the hands of your typical senior citizen, would they get out and spend it like they're supposed to stimulate the economy?

LOUIS JOHNSTON: Probably, in the sense that they're at a point in their life cycle where they're not saving. They're not putting money aside for the future as much as using their savings and spending it down. I know that sounds kind of clinical and cold, but that's just from an analytical point of view. So they would be a good source if you were doing that.

But the other point that I wanted to address from the caller, which I think is important, is that not only is there the inflation problem that Chris mentioned and I think is definitely something we have to keep an eye on, but also seniors when they are either downshifting or retiring or unfortunately, if they have to go into a nursing home or assisted living, they need to be able to sell their homes. And they need to be able to liquidate their financial assets.

And if the financial markets seize up, if there's a problem where people can't sell their homes or can't sell them at the prices they need to, that's going to hurt seniors badly. And so I think the Fed's action actually will help seniors in that way because now they can still withdraw from their pensions and from their 401(k)'s and so on. Or in an orderly way, they can still participate in the real estate market if they have to do a reverse mortgage or sell their house. And so I think, actually, in that perspective, it will benefit them.

GARY EICHTEN: Well, you mentioned 401(k)'s, this brings us to another question. Louis, Chris, I know you folks are not in the business of providing financial advice, but-- so you're looking at your retirement kitty, there.


GARY EICHTEN: Given the uncertainties that people face, Is it time for at least some folks to say, [LAUGHS] I wash my hands of this-- off to the money market, I go?

CHRIS FARRELL: I think for some people, that absolutely does make sense. I mean, what you don't want to do is panic, all right? Because what happens when you panic is you're just going to make some wrong decisions. But a lot of it depends on what stage of life you're in. If someone listening to this is 25 years old, and they're participating in their 403(b), their 401(k), hey, you're not retiring for 35 years.

And by the time you get close to retirement, we'll have redefined it anyway. So increase your contributions in the market. Buy some good companies at a cheap price. You're 61, 62 years old, I absolutely think that you need to go more conservative. You need to have more cash. You should be investing in things like Treasury Inflation-Protected Securities, where you have no default risk, no credit risk. And inflation does emerge as a problem, hey, you're protected against that rise of inflation.

Doesn't mean you flee the stock market. But yes, you should be more conservative. And in one sense, it's too late if you're out to make money to be more conservative. To get yourself in the right sectors of the market, the more defensive stocks that are going to benefit. But it's not too late if you want to take a more conservative overall posture in your portfolio. And then there's nothing like a little volatility in the market to concentrate the mind.

GARY EICHTEN: Louis, your thoughts?

LOUIS JOHNSTON: Yeah, I think Chris put it well that if you're out there to try and make money on ups and downs and do what economists and financial people call arbitrage, I would get out. You're in the middle of a storm, and you're going to get dashed against the rocks. But the reason why you put money fundamentally into stocks and bonds and financial assets is primarily to save for retirement, save for the future.

And unless you fundamentally believe that the US economy has some terrible, awful structural problems that's going to cause it to either slow down dramatically for 20 or 30 years or even go negative for some period of time, which I don't categorically think, you're going to be fine. It's just that you need to maybe turn off CNBC or stop listening to Bloomberg or one of those. And just don't look at your 401(k) or your 403(b) for a while and just let it be.


CHRIS FARRELL: And just a very brief point. How many times have we had this conversation over the past years? I mean, we've had these turmoils in the market and these real downturns. This is going to happen. And so therefore, I think people should construct their portfolio so they can sleep at night. And yes, when times are good, it's really nice to say about how much it's up. But you know the bad times are going to come, and you'll go through it.

So construct your portfolio. That takes into account the bad times. This should not come as a surprise in the sense that-- it should come as a surprise that it's happening right now. I mean, I'm not saying you could forecast this a year ago. But it shouldn't come as a surprise that we're going to go through a period of turmoil like this.

GARY EICHTEN: For those of us who enjoy gloom and doom--

CHRIS FARRELL: Policy, Gary.

GARY EICHTEN: --tell me tell me why it is that we shouldn't be concerned about the long-term economic health of the United States. We have a huge budget debt or a debt, federal debt. We have all these people retiring to a Social Security program, which is a little bit strained now. The Medicare program is virtually bankrupt. China is on the ascendancy, India on the ascendancy. We don't make anything in this country anymore. So why is it that we shouldn't--

CHRIS FARRELL: Can I crawl under the desk at this point?


LOUIS JOHNSTON: I'm hanging up now.

GARY EICHTEN: --is it that we shouldn't be concerned about the long-term health of the United States' economy?

LOUIS JOHNSTON: I think we should be concerned about it. But it's you should be concerned in the following way. You should ask, What could the economy have done if it didn't have these problems? How well would the economy have grown had we dealt with Social Security and Medicare five or 10 years ago, rather than dealing with it in five or 10 years from now?

We're not going to do as well over the next 50 years as we would have if we'd have dealt with those problems. But we're still going to be OK. And the reason, primarily, is because in the long run, longer periods of time, economic growth is driven primarily by innovation and new ideas. And I can't see that anyplace on the face of the planet is doing a better job of that than we are. They may be doing just as well or close, but they're not doing better. And as long as that's true, the US economy is going to continue to do well.


CHRIS FARRELL: Well, and just off what Louis has said and what this litany that you've gone through, and you think about, OK, what's really important when we think about economic growth and offset the forces that you're talking about-- innovation, entrepreneurship, educated population, jargon term, human capital-- love that word. OK, human capital.

And the reason why-- and what we should be talking about, all those negatives. And we should be talking all the time about all those negatives that you just listed through, because that's the only way we're going to do something about it. How do we support innovation? How do we support entrepreneurship? How do we get a better educated population? Why is it that we have inner city schools that are not working? This is intolerable. This is a bad situation.

People can disagree about how to deal with it. But the thing is, if we live in this global economy and it's highly competitive and you list all the things you go through, that's what concentrates the mind. And that's what brings about some policy changes.

GARY EICHTEN: Amy, your question, please?

AMY: Hi, thanks for taking my call.


AMY: Well, kind of piggybacking off of what you just said, and if this is actually going to help our economy or not, but it seems that one of our big problems is that we're so focused on purchasing things and acquiring things, including houses and using credit for them and not being able to actually afford them. And my question about the stimulus package is that it sounds like it's something that's supposed to help people, but really, Is it going to perpetuate the problems with consumer?

And if the money is going to just put a Band-Aid on the economy and maybe give a boom to it in the short term, but is it going to solve any underlying problems of excessive purchasing without the means to pay for it in the end?

GARY EICHTEN: OK. Thanks, Amy.

CHRIS FARRELL: We probably would disagree about excessive purchasing, Amy. But it is an important question. And it is a good question. And really, what the spending is trying to do is let's limit the downside damage. Look, we know the economy slowed down a lot. Looks like it's going to go into recession. We don't know if it's going to be a short one or a long one. And so what this is really going to try and do is limit the downside. It's going to try to limit the job losses.

And so in that sense, I don't think that it's perpetuating anything except for saying, we just don't want things to get really, really bad. Because if they get really bad, then we're talking about an unemployment rate we don't want to reach. Then there are longer-term questions about the type of economy we have, what people spend their money on. But I think in the short term, I think those questions are almost-- it's not that they're beside the point, but it's that that's really not what the program is out to address.

What the program is out to address is to stem the downward momentum in the economy because if it goes too far down, then we end up with an unemployment rate that we'll all be screaming at.


LOUIS JOHNSTON: Yeah, I think Chris is exactly right. I would just add one point, which is that Amy is getting at something about purchasing things and borrowing to purchase things. And that's something Chris and I have both mentioned, which is that an underlying problem is this middle class squeeze that in order to have the health care they need or to buy the house that will give their kids access to a public school, that's better, they need to borrow more than they otherwise would. And so we've got to deal with that problem. As Chris said, we need to keep asking those questions and hammering away at that and come up with some solutions.

GARY EICHTEN: But is it good public policy to tell people to go, spend, spend, spend? I mean, do people really need that 50-inch TV?

LOUIS JOHNSTON: Well, no, I would argue that that's not what we need. And that's why earlier, I said about the stimulus plan that I'm not sure that this is either going to be very helpful or very hurtful. It's not really what we need that way. And so, no, I don't think so. And I don't know what Chris thinks about that, but that's how I look at it.

CHRIS FARRELL: But I also think people are really where they're in trouble or where they're feeling the financial strain is not because they went out and got the flat panel TV. OK, so the Super Bowl is coming. And all right, maybe I'll add a little bit on there. But what it really is, the price of health care. It's the price of housing. It's the price of their children's college education. It's those things which are really big-buck bills.

And boy, they're hard to evade if you want your children to do better, if you want to grow up in a decent neighborhood, and if you want to live as long as possible, which we're all trying to do. So those bills, you can't skimp on. And that's where the squeeze is coming from. It's less from people being irresponsible with their money because they have to have the latest gadget. I mean, we all know somebody that's like that. But actually, they stand out because they're like that.

GARY EICHTEN: Quick question about this economic stimulus package. The assumption today, anyway, is that it will sail through. But there are already political forces building in opposition to this proposed package. If it bogs down, doesn't pass, is that going to be a big problem? Chris?

CHRIS FARRELL: Well, I think in the end, it will pass. But the longer it goes on, the more it will be looked down upon, the more it will be dismissed, and the more will be treated as a problem. Listen to a number of the questions that we've gotten worried about, well, it's adding to our debt. Not by much, but it is adding to our debt. And if it's too little, too late, I don't think it's going to turn out to be the political insurance policy that the politicians think it's going to be. It's going to turn into the "politicians are a laughing stock" policy.

GARY EICHTEN: What do you think, Louis?

LOUIS JOHNSTON: Well, I think this might be a rerun of 1993 when the Clinton administration came in with one of their big priorities was a stimulus package, and it didn't pass. And it wasn't the problem. We really did OK. And I think that if this doesn't pass, if this gets bogged down, sure, it'll hurt some politicians. And we'll have some yelling back and forth, things like that. But I think we'd be all right, actually, if this particular package didn't pass.

GARY EICHTEN: If it does pass, when can people actually look for a check in their mailbox? Is that how it's going to work? Are they going to send out a check, or are they just going to give you a credit on your taxes? Or do either one of how the mechanics of this or the timing of it?

LOUIS JOHNSTON: Well, they're still talking it over last I saw. But it sounded like they actually were going to send checks, which is annoying to me because that costs money too to do that.

GARY EICHTEN: Chris, do you have any insights there?

CHRIS FARRELL: Yeah, as far as I can see, because Peter Orszag had the Congressional Budget Office. That's the way he's been talking about it, although there are also proposals out to just do it through the tax system. But again, there are some issues about gearing up and being able to do that within-- because as we all know, April is coming closer and closer. So this is at least six months away.

GARY EICHTEN: Before we wrap up, I want to get each of you on record, if I may, as to what it is that we actually can expect for the rest of this year, anyway. Not beyond this year, but are things going to be more or less stable for a while? Chris?

CHRIS FARRELL: I don't think things are going to be more or less stable right now, this period of time. I think we're going through a really wild, volatile time. And while we're trying to figure out, OK, how deep is this recession going to be? How bad is this recession going to be? I expect the first half of the year is going to be fairly miserable.


LOUIS JOHNSTON: Yeah, I think we're going to see a lot of still volatility in different financial markets. We've got another one that showed up today. The bond insurers now look like they're going to be having trouble. And if we look at GDP growth and so on, it's either going to be very, very low or maybe in the second half might even be negative. So we're not looking at a "happy days are here again" kind of year.

GARY EICHTEN: Gentlemen, thanks for joining us today.

CHRIS FARRELL: No, Thanks a lot.

GARY EICHTEN: Appreciate it.

LOUIS JOHNSTON: You're welcome.

GARY EICHTEN: Chris Farrell and Louis Johnston. Louis teaches economics at Saint John's University and the College of Saint Benedict. Chris is our chief economics correspondent here at Minnesota Public Radio here and regularly on our Marketplace and Morning Edition programs and on midday, for that matter. By the way, we're just out of Washington. Congressional leaders and the Bush administration have announced now that they have indeed reached agreement on an economic stimulus package that will give most tax filers rebates ranging from $600 to $1,200.

KERRI MILLER: Programming is supported by Minnesota State Colleges and Universities, educating 92% of the state's law enforcement officers, 78% of new nursing graduates, and 53% of new teaching graduates online at

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