The Charlie Rose Show, March 23, 2009

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CHARLIE ROSE, HOST: Welcome to the broadcast. On the day that the government announced a plan to deal with troubled assets held by many banks, we talk to three journalists from the "New York Times" -- Joe Nocera, Andrew Ross Sorkin and Paul Krugman.


JOE NOCERA, "THE NEW YORK TIMES": The least important and reliable barometer of anything right now is the stock market. And I mean, in this case, you could add another thing. Wall Street guys who trade stocks looked at this plan and said, oh my God, I`m going to get this great subsidy. That can drive the market for a day or two or three days. But you know, we`re really in a situation where credit markets matter more, psychology matters more, real plans matter more. The stock market is almost irrelevant.

ANDREW ROSS SORKIN, "THE NEW YORK TIMES": The credit market, by the way, didn`t flinch today. And the other thing that`s remarkable is the distinction between the folks I was talking to yesterday and their outlook for this, and today. What I mean by that is the private equity investors, the heads of these hedge funds yesterday were saying, you know what, it may be a good plan, they may be offering all sorts of subsidy, but we don`t want to be involved with the government, given what happened last week with AIG, given what happened with all of the -- the tax bill...

CHARLIE ROSE: And the legislation in the House.

ANDREW ROSS SORKIN: The legislation. And are we buying ourselves into that entire fiasco? Today, oddly enough, the same people who I was speaking with about this yesterday, as the market was going up, seemed to come around and seemed to suggest that, you know what, the deal may actually be better than we thought.

PAUL KRUGMAN, "THE NEW YORK TIMES": This is something they can do without legislation. You know, they found a way that they can in effect put the public on the hook for a trillion dollars of stuff without actually getting any approval. You can do it through the FDIC and using the residue of TARP money. And it`s, you know, if they really think they can`t get anything through Congress, then this is sort of a wild swing based upon the few things that they can actually do.


CHARLIE ROSE: We continue our look at the plan and the market with two investors, Daniel Alpert of Westwood Capital and Tom Steyer, founder of Farallon Capital Management.


DANIEL ALPERT, WESTWOOD CAPITAL: What we`re trying to do is get the assets out of the bank without taking the banks over. That`s a very challenging question, because, as we strip the banks of their capital -- because they have to sell these assets at a severe discount -- what`s going to happen on the other end, which is how the bank`s going to recapitalize. Well, the federal government`s going to have to come in.

TOM STEYER, FOUNDER, FARALLON CAPITAL MANAGEMENT: I think that everyone`s under the impression that the administration is supposed to come up with the plan. And in fact, I think that this plan is going to be changed and tweaked and adjusted over time, because there are going to be surprises that happen in the economy.


CHARLIE ROSE: A program note. We intended to include this evening a conversation with Doris Kearns Goodwin and her husband Richard Goodwin about his new play, "Two Men of Florence." That segment will take place later this week. Tonight, because of the government`s announcement, our entire program is about the toxic assets and what the government intends to do. That`s next. The Treasury Department today announced a public- private fund to buy mortgage loans and securities that have paralyzed the nation`s banks. The much awaited program would provide government financing for investments in risky assets, but allow taxpayers to share in profits. The program could cost as much as $1 trillion. At the White House today, President Obama met with his economic advisers and said the plan would repair weaknesses in the financial markets.


BARACK OBAMA, PRESIDENT OF THE UNITED STATES: This morning, Secretary Geithner announced the latest element in this multi-pronged approach, and that is a mechanism that he, in close consultation with the Federal Reserve and the FDIC, has initiated in order to allow banks to take some of their bad assets off their books, sell them into a market, but do so in a way that doesn`t just obligate taxpayers to buy at whatever price they`re willing to sell these assets. Instead, involves a public-private partnership that allows market participants who have every interest in making a profit, to accurately price these assets so that the taxpayers share in the upside as well as the downside.


CHARLIE ROSE: In an interview with CNBC, Treasury Secretary Tim Geithner said the public-private plan was the best available option for the government.


TIMOTHY GEITHNER, TREASURY SECRETARY: This is the best way in our view to protect the taxpayer. The alternative approach, which has the government buying all this stuff, taking on all the risk on the balance sheet, would be much more expensive to the taxpayer. The alternative of letting it just sit there, let these assets just sit in the balance sheets of banks, would risk creating a much longer, deeper recession.


CHARLIE ROSE: The markets responded positively to the news. The Dow Jones Industrial Average and the S&P 500 each soared about 7 percent today. Joining me now, top journalists from "The New York Times" who have covered the financial crisis. Here in New York, Joe Nocera, columnist, and Andrew Ross Sorkin, who co-wrote today`s front-page story on the Treasury`s plan. From Princeton, New Jersey, columnist Paul Krugman. He`s the author of "The Return of Depression Economics and the Crisis of 2008," and won a Nobel Prize. I am pleased to have all of them here on this program. I begin with Joe Nocera. Tell me what this plan is.

JOE NOCERA: Well, it is an attempt to finally, finally, finally get the bad assets off the balance sheets of the banks by involving hedge funds and other entities who will buy them, supposedly at market prices, with the help of enormous amounts of government loans and subsidies. I mean, that`s how I would describe it.

CHARLIE ROSE: Why -- what`s the reaction of Wall Street?

ANDREW ROSS SORKIN: Well, the reaction on Wall Street`s obviously been quite positive.


ANDREW ROSS SORKIN: As far as the stock market is concerned. The credit market, by the way, didn`t flinch today. And the other thing that`s remarkable is the distinction between the folks I was talking to yesterday and their outlook for this, and today. What I mean by that is the private equity investors, the heads of these hedge funds yesterday were saying, you know what, it may be a good plan, they may be offering all sorts of subsidy, but we don`t want to be involved with the government, given what happened last week with AIG, given what happened with all of the -- the tax bill...

CHARLIE ROSE: And the legislation in the House.

ANDREW ROSS SORKIN: The legislation. And are we buying ourselves into that entire fiasco? Today, oddly enough, the same people who I was speaking with about this yesterday, as the market was going up, seemed to come around and seemed to suggest that, you know what, the deal may actually be better than we thought, and hopefully I think they`re getting some sense that some of this AIG tax craziness really -- I hate to say craziness -- is maybe behind us, and perhaps they will be able to participate and not feel the pressure.

CHARLIE ROSE: So it`s mainly that`s gone. They feel less of that than it is some sense that this is exactly the way to go.

ANDREW ROSS SORKIN: And the terms. No, but the terms of this are extraordinary. You know, the government effectively becomes a massive bank or a hedge fund unto itself, because what the government is doing is allowing private equity funds and hedge funds and others to leverage -- this is the same tough that got us in trouble the first time -- to leverage their investments in these toxic assets at incredible ratios, at six times, six times. When you add in the equity component, you get to 12 times. And you recall a year ago when we talked about people leveraging things at 12 times, it didn`t end well.

CHARLIE ROSE: Can you explain the difference there and what`s happened?

JOE NOCERA: The government has limited amount of TARP money. There`s $100 plus billion maybe left. They know that they can`t go back and get more because there`s so much congressional outrage and popular outrage. And at that hearing at AIG last week, I mean, there were a lot of congressmen who said, you know, forget about coming back. So they feel like they have to maximize every dollar. And...

CHARLIE ROSE: But at the same time, there are people saying they`re going to need $1 trillion, if they knew the valuation of all these assets, to do the job.

JOE NOCERA: Oh, I don`t even think a trillion dollars is going to be enough. A trillion dollars is just going to at least -- their eye view, a trillion dollars is at least going to liquefy the market and create a market for the securities finally so that you can value them, you can get them off the banks, and you finally have a marketplace working again.

ANDREW ROSS SORKIN: If we can get the valuation right. And that is the one thing that this -- we haven`t figured that piece out. There is still a wide range between the bid and the ask. The banks want more than the investors are willing to pay. The goal here is that by juicing the potential return for the investor that the investor will effectively be willing to potentially overpay for the asset, recognizing that their risk on the downside is so low.

CHARLIE ROSE: Does anybody know the value, other than what the market will...

ANDREW ROSS SORKIN: Whatever the market will bear, and at the moment the market won`t bear -- the market so far hasn`t beared anything.

CHARLIE ROSE: All right. Paul, this is what you said today. "Over the weekend, `The Times` and other newspapers reported leaked details about the Obama administration`s bank rescue plan, which is to be officially released this week. It happened this morning. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy, specifically the cash-for-trash plan proposed and abandoned six months ago by the Treasury Secretary Henry Paulson. This is more than disappointing. In fact, it fills me with a sense of despair."

PAUL KRUGMAN: Yes. So look, I mean, this is the Paulson plan. It`s really important to understand that. That getting past the details, this is the same plan that was advanced six months ago, wearing a fake mustache and sunglasses to make it look different, but it`s basically the same plan. They`ve just done it in a more complicated way with all this leverage, which is a huge -- you know, this is basically -- that`s a huge gift to people who participated, because they get most of the gains, or at least half the gains. But if there are major losses, the taxpayer pays most of the loses. So it`s heads, you win, tails the taxpayers lose. And it`s going to buy up these assets, and it`s clinging to the idea that the real problem here is that actually this toxic waste -- or I guess it`s now toxic legacy waste -- is really worth much, much more than anybody`s willing to pay for it. And if only we could make people see that it`s really not that bad, then the banks will be in fine shape and everything will start flowing again. And that`s just, you know, it`s possible, but it`s a very hard position to defend if you put it that way. And so, what the despair I`m feeling is about -- they punted on the key issue of what do we do with banks that are really busted. They really have chosen to think that some rearranging of the market furniture is going to solve the problem. You don`t have to confront the key issue head on.

CHARLIE ROSE: And you say, so the plan is to use taxpayer funds to drive the prices of bad assets up to, quote, fair levels.

PAUL KRUGMAN: That`s right. The idea is that, you know, you have basically this stuff. The banks refuse to sell it unless they get 60 cents on the face value. The market is only willing to pay 30 cents. They believe that if you do this stuff, that somehow it will get up to something like the 60 cents that banks are willing to sell it for, and then everyone will say, ah, see, the banks -- really, we were wrong to think that they were in as much trouble as they are. Once we`ve got this market liquefied, everything is fine. And that`s just -- it`s a leap of faith in the face of a lot of contrary evidence. It`s just -- I called it over the weekend in a blog post, it`s a zombie idea. You keep killing it and it keeps coming back. And here it is again, and it`s become the centerpiece of the administration`s financial policy.

CHARLIE ROSE: OK. But put on the table the Krugman plan.

PAUL KRUGMAN: Oh, it`s -- the Krugman plan is the Swedish plan, it`s the reconstruction trust -- Resolution Trust Corporation plan. What has historically happened when you have a major financial bust is that the public, the government steps in and says, OK, we`re going to say - - we`re going to guarantee the following classes of bank liability. We`re going to say that, you know, if you`re going to lend money to the bank, you`re safe. If you`re a depositor, you`re safe. But at the same time, we`re going to go in and take a look and see the banks that are really under water. We`re going to put them in receivership and we`re going to restructure them and we`re going to clean out the stockholders, probably going to replace the existing management. It`s a plan that`s targeted on making people feel secure and putting their money with the banks, and at the same time cleaning up the most troubled banks. Whereas this is a plan to hope that we can convince everybody that the bad investments that the banks made weren`t quite as bad as they look. It might work, but it`s really -- it`s an act of evasion.

ANDREW ROSS SORKIN: You know, Paul`s right in one sense, which is that there is an element of smoke and mirrors here, which is to say that we could buy these assets as taxpayers on our own, and that actually would not be that different, frankly, from what`s happening here.

CHARLIE ROSE: Because we`re financing (INAUDIBLE)...

ANDREW ROSS SORKIN: Because all we`re doing is financing this in a way where we bear most of the risk. And unfortunately, we actually don`t get most of the upside. And so, there is an element to what is the difference. The difference is that at least we look like we`re doing something in a sort of free-market way, whereas otherwise we`d be talking about nationalization.

CHARLIE ROSE: Do you -- go ahead, Paul. Yes.

PAUL KRUGMAN: I was going to say that a number of people, myself included, have rolled out little numerical examples over the course of today to show how the incentives in this should make it -- should make the people running these partnerships willing to pay quite a lot more than the assets are worth. That you can make an asset that really ought to be worth $100 and they might well be willing to pay $120, $130, because they get all the upside. It turns out it`s actually worth $150, whereas taxpayers get most of the downside if it turns out it`s actually worth only $50. So it`s not really letting the market find the price. It`s basically bribing people to pay -- pay more for these assets than a cool, calm calculation would suggest that they`re actually worth.

CHARLIE ROSE: OK. But if you did not have this financing of the private side, you`d have no interest in buying these assets, yes or no?

PAUL KRUGMAN: I think the problem is that the banks don`t want to sell the assets at what the market would bear, because they don`t want their book value to go down. I mean, there is -- I mean, I heard Larry Summers earlier say there`s a market failure. And there`s no question there is. This market has shut down. But has it shut down because nobody`s able or willing to buy the stuff, or has it shut down because the banks are unwilling to sell the stuff at what it`s actually worth? And I would argue that the latter is the bigger part of the problem.

JOE NOCERA: You know, it`s also tied in to some degree with this effort under way to ease mark-to-market accounting. And -- which is really a symptom of the same.

CHARLIE ROSE: They always say they believe in. Right?

JOE NOCERA: They believe in it when things are going up.

CHARLIE ROSE: Right, Geithner.

JOE NOCERA: They make this argument that if you hold the things to maturity and if you wait long enough, you know, eventually this stuff is going to come back. And maybe to some extent it will, but there`s a lack of honesty about what this stuff is truly worth on their balance sheets. And it`s the same lack of honesty that haunted Japan, really. And you know, if there were 30 cents on the dollar and the bank was willing to say, OK, I`ll sell it for 30 cents on the dollar, you`d have a liquid market. There would be a market. The reason there`s not a market is because nobody wants to buy them for what the banks have them marked at. That`s the fundamental problem.

CHARLIE ROSE: OK, but no one -- nor does anyone really know what the true value is.

JOE NOCERA: They know what it is right this second. They don`t...

CHARLIE ROSE: It`s nothing, because nobody wants to buy them.


PAUL KRUGMAN: If you want to sell it for 25 cents to the dollar, they`ll buy this.

CHARLIE ROSE: Sure, but is that the market then, 25 cents?

PAUL KRUGMAN: Well, the market is what people are willing to pay in the real world, you know.


JOE NOCERA: General Electric stock was $5...

CHARLIE ROSE: So, wait, wait, folks. So what should -- let`s assume you go through some process that Andrew suggested, in which the public buys them. What should they pay for them?

PAUL KRUGMAN: You know, this is -- you make a guess of what you think the stuff is worth. People are doing that, right?

CHARLIE ROSE: You make a guess as what you think it`s worth?

PAUL KRUGMAN: Based upon default rates, what you think the outcome for -- but look, people have -- some people have bought some of this stuff. Some financial institutions, which are in relatively good shape, have sold off some of their toxic assets because they can afford to see their balance, you know, their stuff mark-to-market. And when they sold it, actual buyers out there, people have bought it, have been willing to pay something like 30 cents on the dollar. It`s not that there are no transactions. Most of this stuff is sitting there, but as Andrew said, it`s sitting there because the banks are not prepared to admit that the stuff is worth a lot less than what they`re carrying it for on their books.

CHARLIE ROSE: Do you think Secretary Geithner understands that and recognizes that, and that`s why he`s creating this financing of the process?

PAUL KRUGMAN: I`m actually -- I`m pretty sure that he and the people around do understand it. I think I have some reason to believe that they understand that they`re handing a subsidy in there that they`re quite aware that taxpayers are bearing the downside. Part of this, and you know, I will make some excuses for them. I think, as you yourself pointed out, this is something they can do without legislation. You know, they found a way that they can in effect put the public on the hook for a trillion dollars of stuff without actually getting any approval. You can do it through the FDIC and using the residue of TARP money, and it`s, you know -- if they really think they can`t get anything through Congress, then this is sort of a wild swing based upon the few thing that they can actually do.

JOE NOCERA: And you would need legislation if you were to nationalize one of these banks. Nobody -- you know, the FDIC does not have the authority to take over a big bank holding company, for one thing.

PAUL KRUGMAN: I don`t think that`s -- well, OK.

JOE NOCERA: But one of the appealing things about an RTC-type solution that you were talking about earlier is that you don`t have to value the assets at that moment. You just take them. You take them off the books and you work it out. It`s a workout. OK, somebody...

CHARLIE ROSE: So you`re going to say, well, I`m going to take these assets and we`ll figure out how much they`re worth later?

JOE NOCERA: A piece at a time. Somebody wants to buy this little sliver for X, you say OK, I`ll sell it to you, but I want some upside. When they did the S&L workout, there were a million different deals, many of which worked out very well for the government, some of which did not. But every little piece, every piece of asset, every piece of equity that was sold, the government often got them upside, the government cut all kinds of different deals. And that`s how they worked it out. There was no sort of blanket thing, well, saying, well, they`re all going to be worth 30 cents on the dollar, they`re all going to be worth -- they just waited to see how it`s going to work out.

CHARLIE ROSE: My impression is it worked out OK, didn`t it?

JOE NOCERA: Well, the taxpayers lost $130 billion on the S&L crisis, but they would have lost a heck of a lot more without this kind of structure.

PAUL KRUGMAN: And by the way, we might say that the S&L crisis did cost the taxpayers $130 billion, and that was with a very well designed workout. And that was back -- you know, that was 20 years ago, when $130 billion was actually a lot of money. So...


PAUL KRUGMAN: ... when you think about what this is going to cost, it`s -- you know, part of the problem is that we just haven`t been willing to face up to the scale of the mess we`re in. And Congress isn`t willing and the administration -- maybe because it`s looking at Congress -- isn`t willing. So all of this is hoping that we can do something fancy and obscure and make it all go away.

CHARLIE ROSE: See, that`s really scary to me. If you`re saying nobody wants to face up to the size of the problem and hope it will go away, then it`s just going to compound and compound and compound.

PAUL KRUGMAN: The Japanese, I think we owe some apologies to the Japanese. We spent a lot of time talking about, oh, those Japanese, they were slow to respond, they didn`t want to admit to the scale of the problem, they didn`t do what was necessary, and we are doing exactly the same thing. We`re looking exactly, you know, maybe we should start calling them (INAUDIBLE)...



ANDREW ROSS SORKIN: When you look at the criticism of how we approached the S&L crisis at the time, the same type of criticism that we are talking about right now at this table was taking place then. And so, you know, only with hindsight are we going to really know. Nobody really knows what`s going to happen here. It may very well be that 10 years from now, we look at this and we say, we acted so fast and look at the American model. We were brilliant all over again. Now, maybe not. I hope it`s the first case.

CHARLIE ROSE: At the same time, they argue that we`ll do -- we will never get this economy back right unless we can get credit flowing again.


CHARLIE ROSE: And that credit will not flow until we get these bad assets off the balance sheet.

ANDREW ROSS SORKIN: No question. And one point I was going to make, you asked before how do you value this stuff? You know, some people have valued it. Obviously, Paul had talked about people talking about 30 cents. John Thain, before he left Merrill Lynch, had sold a huge slug of this stuff for 19, 20 cents I think on the dollar. And you asked how did they do that? They literally take these CDOs of all these bundled mortgages and they unwrap them and they lay them down on the table. They make calls to figure out where the homes are, whether people are going to be able to pay or not pay. That is how this is going to happen. And when this program goes into effect, that`s going to be the tough part for investors, to be able to sort through all of this stuff and be able to make a gamble or a guess, because you`re never really going to know entirely what`s on there.

CHARLIE ROSE: OK, there are two big questions. One, you think it`s too early to tell whether it`s going to work. You don`t know.

JOE NOCERA: I do, but I think that about almost everything that these guys do now. But I`m always -- I`m always a little bit...

CHARLIE ROSE: Why is that, because nobody knows?

JOE NOCERA: I`m always a little more hopeful than Paul or others, and then I get my heart broken again and again and again. Nobody -- there`s no way of knowing.

CHARLIE ROSE: But Paul, do you buy that? There`s no way of knowing whether this is going to work? You simply say it`s not going to work.

PAUL KRUGMAN: That`s the old joke, you know, what do you think about the French revolution? Too early to tell.

CHARLIE ROSE: Chou En-lai.

PAUL KRUGMAN: The thing about, look the S&L -- actually we did wait. We spent seven years avoiding the problem, and we turned what would have been a $15 billion problem into a $130 billion problem. So it was both. We were Japan from the `80s, and then we were Sweden after `89. Now, you know, same thing here. The only thing is that you have to go with what you can make of the situation. It might be that it will all work out. It`s -- by the way, it`s not -- we don`t actually know that we have to fix the banks to recover. That`s also something that`s a something that`s a little bit of an article of faith. I mean, I think it`s probably true, we don`t know that either. But the problem is that based on the best guess we can make, we are not actually tackling the problem.

CHARLIE ROSE: So why do you think the market is doing what it`s doing?

PAUL KRUGMAN: Oh, you know, I still always go -- Bob Shiller at Yale did, during the great `87 stock market crash. He asked people in real- time, he was able to ask them, why are you selling? And they said, well, we`re selling because prices are going down. There was no actual cause. And I think there was -- the plan at least was announced well. It was a better rollout than the last time. There was some good news on housing, and then people probably looked around, looked over their shoulders and saw that the market was rising and decided it was time to buy.

You don`t want to read a whole lot into one day`s action on the market.

JOE NOCERA: The least important and reliable barometer of anything right now is the stock market. And I mean, in this case, you could add another thing. Wall Street guys who trade stocks looked at this plan and said, oh my God, I`m going to get this great subsidy. That can drive the market for a day or two or three days. But you know, we`re really in a situation where credit markets matter more, psychology matters more, real plans matter more. The stock market is almost irrelevant.

CHARLIE ROSE: This is the "Newsweek" cover story today, out today. "The thinking man`s guide to populist rage." How powerful is this rage in the country and what consequences could it have?

JOE NOCERA: Well, first of all, it`s incredibly powerful. If you saw the AIG hearing last Wednesday, where one congressman after another just wanted to beat Ed Liddy over the head, the CEO, who`s been on the job all of six months and, you know, all over this $160 million in bonuses, which is -- I`m not saying people shouldn`t be upset about it, but you know, given the billions and billions and billions at stake with AIG, it just seems like -- just seems not the thing to get crazy about. But you know, they had a tour of some AIG homes this weekend, some protesters.

CHARLIE ROSE: Went from home to home to home.

JOE NOCERA: Yes, it`s terrible. And it actually is destabilizing. It`s causing, you know, people -- it`s causing people to want to give money back, the TARP money back, which maybe they shouldn`t be doing right now. It`s causing people...

CHARLIE ROSE: These are banks who are saying if that`s the way it`s going to be, I want no part in this.



ANDREW ROSS SORKIN: I have a column in tomorrow`s paper on this very subject, which is that Goldman Sachs is preparing in the next couple of weeks, ideally, to give their $10 billion back. That is a direct result of what has been happening...


ANDREW ROSS SORKIN: ... over the past week and a half. They cannot - - they say they cannot do business in this environment. Now, Goldman may be able to afford to give the $10 billion back. They have about $100 billion on their balance sheet. But other banks are going to then feel pressure to do what Goldman`s doing. And they may not be in the same situation. They may actually need the money. But in a competitive landscape, they don`t want to be on that list, that TARP list. And so there is a very destabilizing effect potentially to all of this populist rage.

CHARLIE ROSE: There were certain banks like J.P. Morgan, didn`t want to be on the list anyway, didn`t want the money in the beginning.

ANDREW ROSS SORKIN: Oh, they all say they didn`t want it. And the whole point of giving it to all of them was to destigmatize the process. But by having one of them, just one of them, give the money back, you`re going to create a domino effect, where everybody`s going to want to give it back, or you`re going to see the stigma all over again.

CHARLIE ROSE: So do you think it`s likely to happen?

ANDREW ROSS SORKIN: I think it`s very likely to happen...

CHARLIE ROSE: You`re saying that Goldman`s going to do it.

ANDREW ROSS SORKIN: It is very likely that Goldman will do it in the next several weeks. What happens after that is a bigger question.

CHARLIE ROSE: Well, as a reporter, I`m sure you called up some others and said, look, Goldman is going to do this, what do you think?


ANDREW ROSS SORKIN: I think some of the stronger firms are going to - - try to do it immediately and follow. You might even see somebody try to do it first. J.P. Morgan has been out there saying they would like to get rid of that money as well. But then you talk about the Bank of Americas of the world, you talk about the Wells-Fargos of the world, you talk about the Citigroups of the world. Can they afford to do it?

JOE NOCERA: Well, I was just going to say, one of the things that fed into it really has been a total lack of transparency, the enormous effort it`s taken to find out who AIG`s counterparties were, how much they got. And the government kept saying we want to be transparent, but they weren`t. They were very secretive. And so as this information leaked out into the public, it was one bomb shell after another, and people just became angrier and angrier and angrier. And now we`re at the point where, just to take AIG, for example, the government needs to sell the insurance units to get its money back.


JOE NOCERA: And if you`re busy beating AIG over the head saying they`re a bunch of crooks and nobody should do business with them, how are they going to be able to get anything remotely of what they need to get their $70 billion or whatever it is back?

CHARLIE ROSE: Paul, are you disappointed in President Obama?

PAUL KRUGMAN: Yes. I mean, I`d hoped that he would be a lot stronger on these things. I mean, you know, if I can say this, I think he`s got a kind of equitable moderating temperament, which is a very good thing most of the time, but these are extraordinary times. And what he`s done -- the stimulus bill was a good thing, but too small. The bank rescue plan is possibly a little bit hopeful, but way short of dealing. You know, it`s just one thing -- at each step everything is less than we need. And that has a cumulative effect. I am just feeling that we`re not getting this thing under control. And of course, there are political obstacles, but he`s got the bully pulpit. He should have been out there from day one -- actually from day minus 30, long before he actually stepped into office -- telling people we are going to have to do these drastic things. We`re going to have to really restructure the banking system, we are going to need a fiscal policy that`s completely unlike anything you`ve ever seen before, because this is the crisis of (inaudible) generation.

CHARLIE ROSE: But would you take it then to the second stage and say, well, he shouldn`t be talking about health care and he shouldn`t be talking about energy and he shouldn`t be talking about education, just talk about the economy and don`t bother me with these other things, because they are distracting?

PAUL KRUGMAN: No, I don`t think it works that way. I think having a broad, bold agenda all works together. I mean, when I think, you know, FDR -- you could have said why is he worrying about retirement plans in the middle of the Great Depression? But in fact, unemployment insurance and Social Security and the Works Progress Administration all came together. So no, I think the long-term agenda is actually the best thing, and I actually think it has helped build confidence in the rest of it, but unfortunately not enough. No, he`s got to be -- you know, really take leadership here.

CHARLIE ROSE: All right.

JOE NOCERA: One of the reasons he`s bold on these other issues is because he spent a lifetime thinking about them. He knows what he thinks about health care. He knows what he thinks about education. He doesn`t need an education from Larry Summers and Tim Geithner to tell him what -- but he hasn`t spent his life thinking about finance. So there`s a lack of confidence on his own part about what he ought to think about it.

CHARLIE ROSE: Yes, but you have got two very smart guys, Paul Krugman and Larry Summers, see this differently. So...

PAUL KRUGMAN: You know...


PAUL KRUGMAN: Do we know that, actually?


PAUL KRUGMAN: Do we know what Larry actually thinks?

CHARLIE ROSE: Oh, no, very good point. So what, so you`re saying what the administration is doing is not necessarily what Larry thinks, and maybe he wants them to go in a different direction?

PAUL KRUGMAN: Yes, or maybe it`s conditioned by their sense, which may be wrong, about the political possibilities. I mean...

CHARLIE ROSE: Clearly, that`s a factor, because without the political consideration, you know, you won`t get anything through the Congress.

PAUL KRUGMAN: Yes. But there is a problem in Washington, always, which is that you start to think of your political limitations, you start to blur the line between what you think you can actually get through Congress next week and what you think you really ought to do. And you start to -- it`s a very hard balancing act, to be able to keep clear in your mind the difference between what you think is politically feasible right now and what you think is actually the right policy. And I think -- anyway, we don`t know. You know, they didn`t try. They didn`t come in with a $1.3 trillion stimulus plan and see how far they could get with it. They scaled it down to what they thought they could get through Congress, and that`s what they got. And it`s been that way all along. It would be hopeful if Obama had more of a kitchen cabinet that he could really delegate things to. That may be part of the issue. You know, if he had an economics person that was really his alter ego, then he wouldn`t have to be educated so much. He could say, here, you get educated. But I don`t think we -- that`s what we really need.


JOE NOCERA: You know, FDR had a kitchen cabinet, but he knew his own mind so clearly that he often ignored them. None of them wanted him to go off the gold standard, for instance, and he just said, I think the gold standard is silly, we`re going off it.

CHARLIE ROSE: Paul`s point there would resonate, which is if you don`t know your own mind about a subject you never had to deal with, then you may not know what it is you firmly believe is the right way to go. Then you`re in -- I mean, I hate to use this phrase, but it`s uncharted waters.

PAUL KRUGMAN: Yes. Look, the cliches are flying everywhere.


PAUL KRUGMAN: It`s impossible to avoid. I think, it`s, you know, I would have loved to have seen actually, you know, Paul Volcker sitting there, he`s seen it all. And just sort of...

CHARLIE ROSE: As secretary of the Treasury?

PAUL KRUGMAN: No, I think not. I think -- but as sort of the guy, the wise man with the president`s ear. And we don`t actually have that. We have two, you know, smart guys, two wise guys rather than a wise man, and they are great. They`re very smart guys, but it`s not clear that, you know, either of them has this sort of unquestioning trust of the president.

CHARLIE ROSE: You think he`s too pessimistic?

ANDREW ROSS SORKIN: No, unfortunately, unfortunately, I don`t think he`s too pessimistic. There are a lot of people who have Paul`s view, Nouriel Roubini, and a lot of people who called this right over and over again, who will tell you we are very far from the bottom.

JOE NOCERA: The problem with Paul, the problem with Paul is that since September at least, he`s been basically ahead and right on all of this stuff.


PAUL KRUGMAN: And I`m sorry. It`s probably all my fault.

JOE NOCERA: You know, if you had been a little wronger and we were in better shape, we could be smiling a little more.

PAUL KRUGMAN: I would be smiling more too. I mean, really is -- it has been -- you know, this is -- this is -- one thing I will say, this is not -- people say this is like nothing we`ve ever seen before. It`s actually like everything we`ve seen before, all happening at once, and all reinforcing each other. All the crises.

CHARLIE ROSE: All right. Thank you very much, Paul. Great to see you. Thank you, Joe. Thank you.

PAUL KRUGMAN: Thank you, Charlie.

JOE NOCERA: Thank you.

CHARLIE ROSE: Andrew Ross Sorkin`s column tomorrow is...


CHARLIE ROSE: Goldman Sachs, oh, yeah.

ANDREW ROSS SORKIN: On whether they give the money back.

CHARLIE ROSE: Watch for that. Goldman Sachs may be giving the money back. We`ll be back. Stay with us. We continue our look at the government`s stabilization plan with two investors, Daniel Alpert, the managing director of Westwood Capital, investment bank here in New York. In San Francisco, Tom Steyer, founder of Farallon Capital Management. His firm`s clients are generally foundations and college endowments. I`m pleased to have both of them here on this program. Tom, I begin with you. Tell me what you think of this program and whether you think that there will be a huge participation by people who do what you do.

Originally broadcast, 3.23.09