This is a rush transcript from "The Journal Editorial Report," June 13, 2009. This copy may not be in its final form and may be updated.
PAUL GIGOT, HOST: This week on the "Journal Editorial Report," the stimulus speed up. President Obama promises to get more money out the door and to save 600,000 more jobs in the next 100 days. We'll double check his math.
Plus, 10 big banks get the green lights to repay their TARP loans. But one name is conspicuously missing from that list.
And tensions mount with North Korea. The U.N. Security Council agrees on new sanctions as the rogue regime uses two American journalists as bargaining chips.
The "Journal Editorial Report" continues begins now.
Welcome to the "Journal Editorial Report." I'm Paul Gigot.
Days after learning unemployment rose to the highest level in almost 26 years, President Obama promised this week to ramp up the pace at which funds from the $787 billion economic stimulus package are spent. So far only $44 billion or just over 5 percent have actually gone out the door. The president predicted Monday that the increased spending would save or create 600,000 more jobs by summer's end. That's on top of the 150,000 jobs the administration claims the stimulus package has saved or created already.
Here to check the president's math, Wall Street Journal columnist and deputy editor, Dan Henninger; columnist, Mary Anastasia O'Grady; and senior economics writer, Steve Moore.
Steve, so, the stimulus money was supposed to stimulate. What's taking so long for this money to get out the door?
STEVE MOORE, SENIOR ECONOMICS WRITER: Well, you know, Paul, when the president signed this bill into action, he said, you know, if we didn't put this bill — if we didn't sign this, if we didn't have this program we'd have 9 percent unemployment rate. He signed it. We've got the money and now we have a 9.5 percent unemployment rate so it hasn't worked well.
You asked the right question, what is taking so long to spend this money and I think the answer is whenever government tries to act quickly it's like watching a race between a snail and a turtle. Government is just too slow and plodding to get this money out the door.
And it really raises the question, if you wanted that money quickly, why not give everybody a tax rebate check. I'm not in favor of that but all the money would be out in the economy right now when needed. And I think the answer is the Democrats wanted this had money to go to their special interest groups like the union and groups like ACORN and so on.
GIGOT: But, Steve, the tax credits are a part of this deal and that money is going out there as we speak. And it doesn't seem to be making that much of a difference.
GIGOT: Are the critics from the left, Paul Krugman and others right, that this was an insufficient stimulus. We should have spent more.
MOORE: Well, that is the interesting — you know, that's a composition you can't possibly refute.
If it doesn't work, they just say spend more and more and more. And I think the problem — the whole problem with this theory, though, Paul, is look at what's happening to the dollar and look at what's happening to interest rates. There is a negative stimulus effect from all of the borrowing that I think is canceling any positive effects of the spending.
GIGOT: Let's look at that, the spending, Mary. you've got a $787 billion stimulus, you've got $410 million that was left over from fiscal year 2009, the past year, a budget proposal of $3.5 trillion, and you have the health care spending that is pending, that could be anywhere between $1.2 and $1.5 trillion. Is Steve right that this is having some kind of an effect on expectations for inflation and causing the increase in interest rates?
MARY ANASTASIA O'GRADY, COLUMNIST: Sure, I think that the idea that all of the spending is going to then create growth and then growth is going to create tax revenues and tax revenues are going to be used to pay off the...
GIGOT: And we all live happily ever after.
O'GRADY: That's not flying, particularly in the financial market. As Steve mentioned, interest rates going up, the Fed has to...
GIGOT: The Federal Reserve.
O'GRADY: The Federal Reserve had the idea that they would buy treasuries and by buying the treasuries, in other words, financing the government.
GIGOT: Buying federal debt issued to pay — to finance deficits.
O'GRADY: Right, that that would hold interest rates down. But in fact, the way the market is reading that is that as the Federal Reserve is now blurring the line that is supposed to be a line of independence, and buying federal debt, the market is getting nervous about inflation. And what happens is the 10-year note of the Federal Reserve and the 30-year bond starts to go up in price and those are supposedly tied to mortgage rates.
GIGOT: And those are significant indicators of future inflation expectations. not that there's inflation now in the system because nobody thinks there is, but what people think they might have to repay in ten years or 20 years.
O'GRADY: Right, well, what I'm saying is that the market is worried that the Federal Reserve has taken from the jobs of financing the economy. And that's inflationary.
DAN HENNINGER, COLUMNIST & DEPUTY EDITOR: Paul, there's one place where this is having a real world effect. That's in Washington, D.C. The famous blue dog Democrats are in a panic over all of this data that talking about.
GIGOT: These are conservative Democrats.
HENNINGER: Conservative Democrats from the South, plain states, central. Their constituencies are showing anxiety over this level of spending. And they have been telling Barack Obama that, who expects them to vote for this huge health care initiative that he wants to pass. And they're telling him, how can we pass for that much — vote for that much spending when we have this deficit climbing down our backs.
GIGOT: And, Steve, that's why the president, this week, a day after he talked about getting the stimulus money out faster, came out and said we've got to get the deficits down more. And he brought in all of those blue dogs, brought them in the White House said, boy, I'm a deficit hawk and we won't let those increase. Is that going to fly as a political matter?
MOORE: Yeah, the other big budget story here this week was that President Obama announced he's going back to pay-go. This is pay-as-you-go spending. And when I heard him, I literally thought it was an April Fool's joke when he said this, because this is something put in place back in 2000 — I believe it was 2007, when Nancy Pelosi became speaker. At that time, we had a budget deficit of $150 billion. We had the pay-as-you-go mechanism in place for three years. And now the deficit, that $150 billion, it's $1.8 trillion. everything that president Obama has done over the last three months, everything from the stimulus bill to the bailouts to the children's health plan, hundreds of billions of dollars of spending, has all been in violation of the pay-as-you-go rule.
GIGOT: We are going to have to keep following that, Steve.
But there is one place the stimulus does seem to be working, Washington,, D.C. That's right. The economy is booming in the nation's capital where the area's unemployment rate dropped for the second consecutive month to 5.6 percent in April. The national unemployment rate, we'll remind you, hit 9.4 percent in May. New stimulus projects and investments in green tech in particular look like a jackpot for the beltway. As former venture capitalist and now Democratic Senator Mark Warner of neighboring Virginia put it, it helps to be where the money is or at least where everyone else's money is.
When we come back, banks begin to check out of the Hotel Geithner. Ten of them were given the green light this week to repay TARP loans. But one big one was missing from the list. Should Citigroup be allowed to fail?
GIGOT: The Treasury and the Federal Reserve this week gave ten banks approval to repay the billions they got from the Troubled Asset Relief Program last October. Big names, like JPMorgan Chase, Goldman Sachs, Capital One and American Express, all got the green light and will return a combined $68 billion to the government coffers. One name missing from the list, Citigroup, which this spring's stress test revealed to have a $63 billion hole in its balance sheet. But should Citi be considered too big to fail?
Richard Breeden is the former chairman of the SEC. And he joins me now.
Richard Breeden, good to see you.
RICHARD BREEDEN, FORMER CHAIRMAN, SEC: Thanks, Paul.
GIGOT: So far in this crisis, some 30, more than 30 small and medium-sized banks have been failed and ruled out. And some of the biggest banks, including Citigroup, Bank of America, have been propped up by the government. Is this too big to fail doctrine sound policy? And what do you do about it?
BREEDEN: Well, first of all, it's one of the most serious problems in all the world of regulations. It's one of the tougher problems to deal with. And it's easy to say nobody should be too big to fail. But governments can't stand back and let financial markets collapse or be unworkable and there is a — there is always a fear of the unknown, what do you if you let — what will happen is you let one of the biggest institutions fail? So to me, the safest route has always been the philosophy, if someone is too big to fail, then you need to put in place a program to make it smaller.
GIGOT: To make the institution itself smaller.
BREEDEN: Shrink it.
GIGOT: So we made a mistake in making the banks like Citigroup be the financial supermarkets all of these different arms, is that what you're saying?
BREEDEN: No, I'm not against competition and so, if people want to be in every business in every part of the world, then they need to be prodigiously good at raising capital and managing risk. What I'm saying, if you get an individual institution that gets itself into trouble and persistently stays in trouble over a period of years, then regulators, at some point, have to put a program in place that shrinks the problem until you can resolve it.
GIGOT: All right, when were you at the SEC, in the early 1990s, you were faced with Drexel Burnham, that you had to make a decision whether it should be allowed to die or not. You made the decision that it should be allowed to fail. That was very different than what happened in 2008 with Bear Stearns where the government stepped in and comparable firm, both investment banks.
BREEDEN: They were roughly the same size back in 1990.
GIGOT: Right. Not typically — investment banks not typically considered to have systemic system-wide ramifications if they failed. Tell us about that decision and whether or not that would have been the better route to follow with Bear Stearns.
BREEDEN: Well, the — first of all, it was an easier time for me because we were dealing with the problem of Drexel, but we didn't have this global financial crisis going on.
BREEDEN: And so the system's ability to absorb Drexel was better than the system's ability to absorb problems here. And that's a difference of history. I was very concerned at the time that we had never extended the federal safety net, deposit insurance, access to the Fed window, all the things that properly support the banking system.
GIGOT: Big banks like Citi and JPMorgan.
BREEDEN: And the little banks.
GIGOT: That's right.
BREEDEN: And depositors know that their deposits are covered. We've never extended that across the river into the investment banking world. And if we had bailed out Drexel, it would have said that there were — first of all, it would give an unbargained for windfall to creditors of Drexel. Secondly it would have said now we think they're too big to fail and that would erode market disciplines. So what we did was we moved the broker dealer, the regulated subsidiary, we sold that overnight to Payne Webber and got the public customers out of the way.
GIGOT: All protected, all their money protected.
BREEDEN: All protected, hundreds of dollars. And then we said, for the sophisticated creditors that had been dealing with Drexel's unregulated company, we said the bankruptcy court is that way.
GIGOT: But do you know what you're saying? You're saying this is still a judgment call on a regulator based on how they view the system. And in the case where you made the judgment, you said, all right, the system can take the failure. And in Bear Sterns they said no. There's a lot of people thought that failure, to let Bear Stearns fail, led to a cascade of people believing there's no way anybody else would fail and that created the big problem a year later.
BREEDEN: Well, one of the big issues in this area, when you're dealing with unwritten law and creating — every time a regulator acts, you have to remember you're creating expectations.
BREEDEN: So when the Bear rescue happened, it sent a message to the market that Lehman and Merrill would also be rescued in a similar way. And they were rescued in the sense the equity got wiped out but their debt was protected.
BREEDEN: So what was most shocking in Lehman wasn't that an investment bank was allowed to fail, but the debt wasn't protected when it had been protected in Bear Stearns. And that surprise is the kind of thing that shocks markets.
GIGOT: I think, for a lot of people, they wonder, why isn't bankruptcy an option for some of these big banks? Why, for example, is the management at Citigroup still in place? Why are the shareholders? They've been hurt because of share prices falling, but haven't been wiped out like Continental Illinois and other banks over time have been, when they failed or have become insolvent.
BREEDEN: Well, the banking system is all, always had its own process for — in effect bankruptcy, through the FDIC. And because it insures the deposits, people understand, that's how the failure of a bank will be handled.
What concerns me a great deal is that Washington, is now talking about extending that system to nonbanks and saying that, well, the FDIC should become a department of too-big-to-fail and they'll roam around the country finding companies that appear to be too big to fail and then impose a different set of standards, presumably, than the bankruptcy code, which covers every other country other than a bank.
In all of these failures — I handled WorldCom a few years back. And the first thing we did was remove every single member of the board who had been there when the problems were created, and remove the new CEO. And you put new people in place rather than allowing the ones who created the problem to continue to sit there. And we have a pretty big deficit of personal accountability to these problems.
GIGOT: We're going to follow this more because that's a problem, too big to fail.
All right, Richard Breeden, thanks for being here.
GIGOT: Still ahead, two American journalists are the latest bargaining chips in an increasingly tense standoff with North Korea. How should the Obama administration respond? And do the U.N.'s new sanctions have any teeth?
GIGOT: U.S. intelligence officials are warning the Obama administration that North Korea may be preparing to conduct a third nuclear test in response to this week's Security Counsel resolution condemning the communist country for its recent nuclear and ballistic missile activities. The resolution comes the same week as two American journalists were sentenced to 12 years of hard labor for allegedly entering North Korean territory.
We're back with Dan Henninger and Mary O'Grady. And also joining us is Wall Street Journal deputy editor Melanie Kirkpatrick.
Melanie, President Obama promised a new era of diplomacy with our adversaries. Why has it gone so sour with North Korea so fast?
MELANIE KIRKPATRICK, DEPUTY EDITOR: Kim Jong-Il didn't get the message.
He saw the new administration as an opportunity to sell the store a third time. He blackmailed the Clinton administration. He blackmailed the Bush administration in its second term. And here is the third opportunity.
GIGOT: Now the conventional wisdom is that North Korea has wanted to bargain its nuclear weapons capability for more money, but now there's a developing view that says maybe they actually want to stay a nuclear power. Do you agree with that? What implications would that have?
KIRKPATRICK: I think they want to stay a nuclear power. It's their only way to be a major — have a major influence or to get the world's attention. Their economy is in shambles. They have nothing else to offer. And they have a new generation of leader coming up.
HENNINGER: I think they want to stay a nuclear power in large part because they'd like to sell the nuclear technology. Proliferation is the biggest threat that's emerging from this North Korea problem. And if it isn't solves, you we've got countries like Saudi Arabia, Egypt and Syria that are going to want to get in the game. And they'll be buying it from North Korea.
GIGOT: So, Melanie, enter the U.N. which comes in with another resolution which says we're going to — we condemn this and we're going to stop this. And they're going to put in new sanctions, including maybe, maybe, interdicting North Korean ships to address the problem that Dan talks about of proliferation. Are these better resolutions?
KIRKPATRICK: No, this is deja vu all over again. The resolution they passed after the first nuclear attacks in 2006 is essentially the same as the resolution that is passed now. And the problem is they don't go to the resolution and they don't put any military actions behind the resolutions either.
GIGOT: And this one is not binding either, right? It's a call upon states to cooperate.
KIRKPATRICK: That's right, and in that sense, it's even weaker than the previous resolution which says — which was — used more forceful language.
GIGOT: What about the two American journalists. This is a terrible story. They were on the border. Nobody knows if they were really inside North Korea or inside China. But either way, they're being held unjustly. What is North Korea up to? In the past, they've held Americans for a very long time, and Japanese for a very long time.
KIRKPATRICK: I think they're trying to use them as a bargaining chip in the nuclear program. The administration, the Obama administration is properly trying to separate the two, but North Korea is having none of it. Eventually, what probably will happen is that the Obama administration will make some concession that will draw North Korea's party talks. And if we're lucky, the two journalists will be released as part of that.
GIGOT: What you're saying, they're going to be doing exactly what the Bush administration and the Clinton administration before then, basically give the North Koreans what they want, right?
GIGOT: And you think that that is going to happen? OK, you do think that's what's going to happen?
KIRKPATRICK: I do.
GIGOT: Is there a better way?
KIRKPATRICK: Yes, there's several things the administration could do. First is put more pressure on China. You know, China is being touted as being this hugely helpful and productive member of the six-party talks — for providing space for meetings.
Well, you know, China provides 90 percent of North Korea's energy. It could cut it off. It could act more toughly.
Second, the United States could pressure the United Nations to enforce the resolutions. And another thing it could do is reintroduce the financial that were introduced in the first half of the Bush administration, which were effective in cutting North Korea off in the international banking system.
And last, but certainly not least, we should improve our missile defense systems so we can defend ourselves against a North Korean threat.
GIGOT: Elect Kirkpatrick commander in chief on that agenda.
All right. We have to take one more break. When we come back, our "Hits and Misses" of the week.
GIGOT: It's time for "Hits and Misses" of the week.
HENNINGER: Well, as the whole world knows, two Democrats in the New York State Senate joined Republicans this week in a coup. The Democrats went nuts. They turned the lights out. The door has been locked. The "New York Post" has been sending guys up there in clown outfits.
And it's all very funny. But you know what, nothing is going to change. As a matter of fact, we were just talking about the stimulus and Congress spending $800 billions. California's legislature has hit the wall. Now this. These legislators are beginning to treat taxpayers' money like sand in a sand back. And I have to tell you, I think there will be a backlash eventually against this. Public disgust is really rising.
GIGOT: All right, Melanie?
KIRKPATRICK: You know the old joke, the Irishman walked into the bar and the punch line, he filed a lawsuit. A woman in 2005 walks into a bar in New York City, danced on the bar and fell, and then filed a lawsuit — filed a lawsuit. The — so I'm giving a hit to the Chamber of Commerce, the United States Chamber of Commerce, who's Legal Reform Institute had a poll which deemed it the most ridiculous lawsuit of the month. It took four years and fortunately a New York City judge dismissed this.
GIGOT: All right.
O'GRADY: This is a miss for Congress, as if they need another one. This week they passed something they call Cash for Clunkers.
GIGOT: It's not their salary, is it?
O'GRADY: This is your big chance to trade in your car, to get a new car and get a $4,000 tax credit. And this will cost $4 billion. And the idea was supposed to be that you would trade in a gas guzzler and get something very efficient. But it looks like you're just going to be able to get a subsidy of $4,000, so.
GIGOT: All right, thank you.
MOORE: The tiny island of Palau will get $200 million in development assistance from the Obama administration. Why? Because they're taking 15 Gitmo detainees. I did the math, Paul. This amount comes out to $12 million per detainee. It would be cheaper to put these people up at the Ritz. And it almost makes me long for the days of the bridges to nowhere, when you see the Obama administration waste money like this.
GIGOT: All right, thanks, Steve.
Thanks to my panel and all of you for watching. We hope to see you right here next week.
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