Transcript: 'The Journal Editorial Report,' July 19, 2008

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This is a rush transcript from "The Journal Editorial Report," July 19, 2008.

PAUL GIGOT, HOST: On the "Journal Editorial Report," customers panic as a big California bank goes under. With more failures likely, how safe is your money?

Rising inflation, $4 gasoline, a plunging dollar, we'll look at what Washington should being doing to clean up this mess.

Plus, Barack Obama is packing his bags for Iraq and sticking to his timetable for a troop withdrawal. But does the public agree?

We find out, after these headlines.


GIGOT: Welcome to the "Journal Editorial Report." I'm Paul gigot.

More bad news on the economy this week as wholesale inflation hit a 27-year high and the U.S. dollar plunged to a historic low. And his twice yearly report to congress, Federal Reserve Chairman Ben Bernanke outlined a host of problems facing the U.S.


BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: The economy continues to face numerous difficulties, including on-going strains on financial markets, declining house prices, a softening labor market and rising prices of oil, food and some other commodities.


GIGOT: Here to make sense of it all is Liz Ann Sonders, the senior vice president and chief investment strategist for Charles Schwab.

Liz Ann, good to have you back on the show.


GIGOT: The economy, a lot of bad news again, but despite it all it seems like we so far have avoided a recession. Is it possible that we could avoid one this year?

SONDERS: I suppose it is possible though I think the chances we are in one is relatively high. Remember the bureau that dates recessions does not typically date it until well after the fact. In fact, the last time two recessions, they dated them, not only after they had begun, but after they were already concluded.

I also think some of it's an issue of semantics. There's no question the economy is very slow and that has a lot implications, the label of recession notwithstanding.

GIGOT: On the housing front, that seems to be the core problem with prices falling and foreclosures still moving to the system. Do you see a bottom at all?

SONDERS: Unfortunately, I don't think we are not in a position to declare a bottom or at least one in our sites. It is hard to judge either in time terms or in percentage-drop terms how much further we have to go. If you go back to some normal historical relationship between the median incomes and median home prices, it suggests another 10 percent or 15 percent drop. It doesn't mean that we have to get there, nor does it mean we will overshoot that. The speed with which that can happen is the tricky part. As odd as it seems, it may be the silver lining to an ugly economic environment. And the same could be said with energy. It may be triggers the correction, the last leg of the correction to happen more quickly, which ultimately would be good.

GIGOT: If you have a 10 percent to 50 percent greater decline in home prices, that's going to flow right through the financial system to the financial institution and that means a lot more bank failures.

SONDERS: I think there will be more bank failures. Maybe not the large variety but the consensus is correct in viewing failures to be picking up at the regional level, given that some smaller banks, some regional banks, their exposure to real estate is more significant.

GIGOT: Let's talk about the other big problem this week, which is inflation, 1.1 percent increase in inflation in June alone, 5 percent year over year. Where do you see prices moving in the months ahead? Are we going to get more of this?

SONDERS: I know the argument is that core inflation is not as elevated as headline inflation and the jokes surrounding the fact that we don't eat or drive, I understand are silly. But core inflation is not elevated to anywhere near the degree we had in the 1970s stagflation environment. And core inflation is a very lagging indicator. I don't think there is a huge risk of that really taking off on the upside. You don't have the wage price spiral we had in the 70s. That's the only problem though, a lot of our trading partners do, a lot of the developing world does. They are starting to export that inflation to us and we have to be mindful of that.

GIGOT: If you are an American's consumer, obviously you don't pay for gas, you don't pay for food in core dollars. You pay in real dollars. And that's one of the reasons I think consumers are so angry, is because they see they're having to pay so much at the pump. For them, inflation seems to be very real.

SONDERS: It is real in the sense of relative prices it is squeezing what little income is left for discretionary purchases. It is not traditional monetary inflation but is it having a dire impact on the consumer? No question about that. It's a question of how we label it and what are the underlying forces behind it.

GIGOT: So you don't see the Federal Reserve and the fact that the Treasury Department encouraged a weak dollar strategy as having anything to do with prices.

SONDERS: It absolutely has been a contributing factor. There's no question in my mind that the weak has contributed to rising commodity prices, which fed into inflation more broadly. Now, whether or not the solution is a quick reversal in monetary policy and rate hikes, given the weakness and the instability in the financial system, is one of those questions that it's difficult to answer. I think it is a relative easy argument to make the weak dollar policy is coming back to bite us.

GIGOT: Looking at Washington briefly, do you see any signs of policies coming out of Washington, whether taxes, trade, monetary policy, where there's a pro-growth bias that will help pop us out of this.

SONDERS: I don't think there is a silver bullet here. I think the rebate checks provided a short-term boost, but, I am don't believe that's a long-term solution to the problem. I think, in terms of what the Fed is doing and the Treasury is doing, trying to take a targeted approach, whether it is to fix some of the deal in the financial sector or provide liquidity. We need to take a targeted approach. But I think the factor of time as much as anything else will solve this. We need to build confidence back in the system. The idea that there is this particular policy or silver bullet that is going to turn things around overnight is a little bit too naive an assumption.

GIGOT: All right, Liz Ann Sonders, it sounds like we have to rely on the determination of the American people again to ride this out. Thanks for being here.

SONDERS: Sure. My pleasure.

GIGOT: When we come back, the growing banking crisis. Customers make a run after a big California bank goes under. Are there more failures to come, and how safe is your money?


GIGOT: Nervous customers lined up outside Indy Mac bank branches in California this week demanding to withdraw their deposits. Indy Mac's assets were seized by federal regulators after the mortgage lender succumbed to tighter credit, tumbling home prices and rising foreclosures. It was the second-largest bank to fail in U.S. history, and almost certainly not the last.

Joining the panel this week, Wall Street Journal columnist Mary Anastasia O'Grady, columnist John Fund, and senior economics writer Steve Moore.

Steve, when we saw the pictures of the bank lines this week, a lot of people called you up, and me up, saying should I take my money out of the banks. What answer should we give them?

STEVE MOORE, SENIOR ECONOMICS WRITER: It looked like a scene out of "It's a Wonderful Life" when you had the bank runs in the 1930s. People should not panic. That's the good news of this story. After all, the vast majority of Americans who have deposits in banks, those are insured by the FDIC up to $100,000.

It is not as if investors are depositors will lose their money. What we have, as Liz Ann Sonders, was talking about, we have a serious banking crisis. And the reason we have a serious crisis is the dollar has fallen, and that has caused a collapse in the value of real estate. And what is it, Paul, that banks own? They own mortgages and those mortgages are not worth what they were worth four years ago.

Until we get, in my opinion, the dollar stabilized again, we will continue to see this compounding of economic problems.

GIGOT: Steve says, Mary, that a lot of these credit problems, the mortgages in particular, but there are some construction loans and credit card problems that are moving through the banking system. And a lot of these have yet to play out. We are looking at more bank failures, are we not?

MARY ANASTASIA O'GRADY, COLUMNIST: We are, Paul, but I think the news that's out there is not the news that will hurt you. That's the news that's already discounted in the market. I think the story is more positive.

GIGOT: The overall economic picture, you mean?

O'GRADY: Yes. The worst thing you can do is listen to the financial analysts now because that's their world, and financial stocks are doing very poorly.

GIGOT: Main Street is better off than Wall Street?

O'GRADY: Absolutely. You have things like indexes that look at the industrial sector of the economy. They're still not in recession. The consumer has not been defeated. You have earnings coming in outside of financials. Still look pretty good. And I think the systemic risk is going down because, as we get this bad news out, I think banks will start deleveraging and I think we have a much positive story here.

GIGOT: That's interesting. There is underlying strength in the economy, but the public thinks we're in a recession. They feel miserable. And I would argue they feel miserable, in part, maybe in large part, because of prices. There are paying $4 dollars for gasoline. They are paying so much more for milk. That's moving through the economy. In other words, its prices, not recession.

O'GRADY: Yes, but there is even good news there.

GIGOT: What is that?

O'GRADY: The good news is that this week, Ben Bernanke said...

GIGOT: The Federal Reserve chairman.

O'GRADY: Yes. He recognized there's inflation. I think what we're starting to see is a higher and higher probability the Fed will start to try to shore up the dollar. When that starts happening, you will see prices that bubble in commodities and oil, start to deflect, and I think there will be more good news for an economy...

GIGOT: I hope you're right.

But we have had several false dawns with Ben Bernanke, having we, Steve?

MOORE: I wish I shared my hero, Mary's, optimism. One problem is, she is right. Up until now, the economy held firm. The problem is you get what I call the reverse-wealth effect, which is America's as wealth has fallen, the failure of their home has fallen, the value of their asset portfolio has fallen. It makes us feel poor. And what happens then is American consumers spend less because they don't feel they have the money to spend. And that causes a cascading problem.

The one thing we all agree on, though, is until the dollar is stabilized, and we start to see Ben Bernanke actually raise interest rates, the problems will continue.

GIGOT: John, let me ask a question about an episode this week, which is the leaked letter that Chuck Schumer, the senator from New York, sent to the Office of Thrift supervision. He leaked it to the press and that, according to that regulating body, triggered the bank run that ended up doing in Indy Mac. Is Chuck Schumer taking responsibility for this?

JOHN FUND, COLUMNIST, OPINIONJOURNAL.COM: I don't think so. I don't think he ever will. He has been grandstanding his entire career and it's been a running joke in Washington. But this had consequences.

GIGOT: $4 billion to $8 billion for taxpayers. People losing their jobs.

FUND: I spoke to a former employee of Indy Mac yesterday who works for the bank and she has two words for Chuck Schumer and they are not happy birthday. I think that Chuck Schumer should bear some responsibility here. In fact, there are laws in California and New York and other states that make it a crime to start a bank rumor.

GIGOT: Like rumor mongering going back to the 1930s. I hope there is an investigation into this, John

All right, thanks.

Still ahead, Barack Obama is packing his bags for Iraq and sticking to his timetable for troop withdrawal. Will the trip change his mind? And does the American public support his strategy? Find out, when we come back.


GIGOT: Ahead of his trip to Iraq next week, Barack Obama is making a case for his exit strategy, saying he stands by his 16-month timetable for withdrawal.


SEN. BARACK OBAMA, PRESIDENTIAL CANDIDATE: In the 18 months since the surge began, as I warned at the outset, Iraq's leaders have not made the political progress that was the purpose of the surge. They have not invested tens of billions of dollars in oil revenues to rebuild their country. they have not resolved their differences or shaped a new political compact. That is why I strongly stand by my plan to end this war.


GIGOT: We are back with John Fund. Also joining the panel is foreign affairs columnist Bret Stephens and editorial features editor Rob Pollock.

Rob, you heard what Barack Obama had to say about Iraq. Is that the Iraq is likely to seat when he goes there?

ROB POLLOCK, EDITORIAL FEATURES EDITOR: Well, the Iraq he will find in an Iraq that has seen virtually no sectarian killings for about 10 weeks, an Iraq where Al Qaeda has been routed, an Iraq where the Shiite- backed militias have been routed, an Iraq where people of all sects and ethnicities are united behind Prime Minister al-Maliki. That's a radically different Iraq never had a year ago. I think Obama has a real opportunity to learn on this trip.

I have been over to Iraq four times myself, twice as part of the official delegations. There are restrictions and so forth because of security, but you still learn a lot talking to people on the ground. and I hope he has an open mind.

GIGOT: What about the political progress, which he expressly addressed and said has not been made in Iraq. And that was one of the main goals of the troops surge?

BRET STEPHENS, FOREIGN AFFAIRS COLUMNIST: That's right. Brian Crocker, our ambassador there, reports 15 out of 18 political benchmarks set in 2006, by the congress and United States as fact...

GIGOT: 15 out of 18?

STEPHENS: Yes, 15 out of 18 have been met. And another important fact, that because of the surge and because Prime Minister Maliki took action against Shiite radicals, the Sunnis...

GIGOT: He's a Shiite himself.

STEPHENS: He's a Shiite himself. But he took action against Muqtada al Sadr's army. The Sunni block has now been reassured that they have a genuinely Iraqi prime minister in Mr. al-Maliki, not a sectarian one. So the Sunni bloc is coming back into parliament. It would be nice if Barack Obama's speechwriters could get their facts straight before they put their candidate on the podium.

GIGOT: Politically, John, if he goes over there and hears what Bret says he will from Brian Crocker and from General David Petraeus, from Prime Minister Nouri Al-Maliki, and the different ethnic leaders in Iraq, is he likely to change his policy we see it.

FUND: I don't politically he can.

GIGOT: Why not?

FUND: Because there is a sizable minority of the Democratic Party that is so against the war in Iraq, if he were to change course, I think they might stay home in November. So I think he's...

GIGOT: Really? You think they will stay home in November?

FUND: If this is a very close election, a few people staying home matters. Remember, the country is divided 50-50 between voters who want a timetable for some withdrawal and those voters who don't want a timetable. The calculation has to be very fine. He is walking a tightrope. I believe that if he comes back, he is basically going to say, I still think we can withdraw. We will still withdraw, but obviously the time of decision we have to wait until I become president and I talk to the generals once again in the future.

GIGOT: That sounds like fudge, John. That's...

FUND: What has he been doing the last few months? Of course. He has too. Remember, he won the nomination, in part, on Iraq. Iraq is less of an issue now. Now it's the economy. But he still has to satisfy his base.

GIGOT: All right, Rob, he wants to learn something, as you say, on these trips and I think he is likely to learn some things. And he is also bringing just about every reporter in America, other than us four, on this trip. What does he hope to gain politically, other than obviously photo ops. John, says there are risks here for him politically. What's the up side?

POLLOCK: I don't know. Obviously he wants to present himself as a leader. I'm not so sure — I think he can learn something. I'm not so sure he wants to after reading his "New York Times" op-ed this week and after listening to his speech.

STEPHENS: He has boxed himself in.

POLLOCK: He has boxed himself in. And this is my problem with him. Look, I don't blame him for not supporting the war. A lot of good people didn't. I don't even really blame him for not supporting the surge. It was bad judgment in retrospect, but a lot of smart people didn't think it would work.

GIGOT: It was bad judgment, in retrospect.

POLLOCK: In retrospect. But a lot of smart people didn't think it would work. But what is blameworthy is that now we are in Iraq, he's not willing to concede the outcome is crucial to our national interest. And now that the surge worked, he is not willing to admit it has. Everybody makes errors in judgment, but only a certain kind of person is that stubborn and arrogant.

GIGOT: Briefly, do you think he's going to change his policy, Bret?

STEPHENS: No, I think he will seize on Prime Minister al-Maliki's very vague comments a couple of weeks ago about a timetable for withdrawal, and say, you see, even the Iraqis agree with us. But the point is, that Maliki could only make that call because the surge succeeded and that was the surge he opposed.

GIGOT: All right, thanks, Bret.

We have to take one more break. When we come back, our "Hits and Misses" of the week.


GIGOT: Winners and losers, picks and pan, "Hits and Misses," it's our way of calling attention to the best and the worst of the week.

Item one, a hit to John McCain — Rob?

POLLOCK: A weird story this week about the "New Yorker" cover satirizing Obama in sort of Islamic dress. His campaign jumped on it quickly and called it tasteless and offensive. Then John McCain, of all people, jumped in and agreed it was not only offensive but suggested satire itself might be somehow unacceptable.

GIGOT: And it was clearly satirical.

POLLOCK: At first I thought, what gives here, is this just another blunder on McCain's part. But as I thought about it more and more, I thought maybe it is some kind of clever campaign jujitsu, the martial art were you use people's momentum against themselves. Here maybe, we have McCain encouraging Obama to be the kind of humorless, stilted overly earnest and ultimately unlikable person, someone who gets upset about cartoons there is.

GIGOT: All right, Rob. You can't give the McCain campaign to much credit for that, Rob.

Next, Lebanon's new national hero — Bret?

STEPHENS: This week, Israel and Lebanon exchanged prisoners. In this case, Israel got two dead soldiers in exchange for handing over a man named Samir Kuntar. People don't remember it, but in 1979, Mr. Kuntar murdered a man, his four-year-old daughter, and caused the death also of a two-year- old girl. Now, he is back in Lebanon. A national holiday was called in his honor. He is considered the dean of Lebanese and Palestinian prisoners. He was received by the president and prime minister of Lebanon.

It's interesting. You judge a country by its heroes, and this is a very, very terrible judgment for what Lebanon has become.

GIGOT: All right, Bret.

Finally, Steve Moore does not want to drive 55 — Steve?

MOORE: Senator John Warner wants to bring back the 55-mile per hour speed limit, Paul. This was the most widely disobeyed and most unpopular law in America since prohibition. I hope John Warner does want to bring that back.

In this country it is a God-given right to drive 70 miles-per-hour on the highways if you want to. For those who want to save gas and want to save some money by driving 55 miles-per-hour, that's your right. But stay in the right lane, Paul, because I'm coming from behind him at 70.

GIGOT: All right, God-given right to drive 70. Thanks, Steve.

Time now for your "Hit or Miss" of the week. Betty Higgins, from Huntsville, Alabama, gives a miss to the Reverend Jesse Jackson for his controversial off-microphone comments about Barack Obama. She writes, "All-consuming jealousy and bitterness taking over the life of a gifted individual is always a mess, such as the said saga of Jesse Jackson. Thanks, Betty.

Remember, if you have your own "Hit or Miss," please send it to us at or log onto

That's it for this week's edition of the "Journal Editorial Report".

Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you here next week.

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