A Wall Street Week Of Biblical Proportions
With Talk Of An Impending Financial Armageddon, The Gov't Takes Unprecedented Action. But Where Will It Lead?
(CBS) We're taking stock this morning of the economic whirlwind that swept from Wall Street across the world this past week. Our Cover Story is reported by Martha Teichner:
At least the Dow ended the week up … 410 points Thursday, 366 points Friday, a glimmer of optimism that the economy might not be allowed to implode after all.
From the moment word reached Wall Street Thursday afternoon that Treasury Secretary Henry Paulson was about to meet with congressional leaders about a massive bailout plan, stocks soared.
The photo op after the meeting was a picture of cooperation and bipartisan unity.
Then there was Paulson, looking like a man in a hurry, announcing his plan:
"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses."
And President Bush, speaking to an audience larger than Wall Street, on Friday morning: "Investors should know that the United States government is taking action to restore confidence in America's financial markets so they can thrive again."
Confidence … there is no more ephemeral, or essential, component in what amounts to a huge gamble that our leaders can pull our economy (perhaps even the global economy) back from the brink of collapse. Yes, that's apparently how bad things had gotten.
"These are the most difficult times I think our markets have faced in the last 200 years," former Securities and Exchange Commissioner Harvey Pitt told Martha Teichner.
Pitt spent a dozen years at the SEC and was its head from 2001-2003.
"Certainly it's been historical; it could've been Biblical," said Mark Zandi, chief economist of Moody's Economy.com and author of the book "Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis" (FT press). "I mean, I was waiting for the locusts to fly through my office at one point."
"This could be comparable to the Great Depression in terms of just its effect on financial markets," said Robert Reich.
Now a professor at Berkeley, Reich was Labor Secretary under Bill Clinton. We asked him what lots of Americans are asking: How did it come to this?
"The people who were issuing warnings were not listened to," he said, "partly because Wall Street is very powerful in Washington. Wall Street kept on saying, 'Well, don't worry about anything, we have everything under control, we don't need more regulation.'"
Regulatory firewalls were put in place to prevent the financial excesses that led to the Great Depression. By the 1970s, banks and securities firms, caught up in major turf wars, lobbied for deregulation … and got it.
"We had over-leveraging in many of these firms," said Pitt, "and the net result was that people were leveraged, in some cases, as high as 100 to one."
People were also making piles of money by trading in packages of questionable mortgages and complicated, unregulated securities, called derivatives.
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