LINDA WERTHEIMER, host:
Here's a problem for investors and others to consider: The popular new president has pushed his economic rescue plan through the Congress. He's given a series of reassuring speeches, including one before a joint session of Congress. But the stock market has continued to fall.
Joining us now to talk about this is David Wessel. He's economics editor of the Wall Street Journal. Good morning, David.
Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning.
WERTHEIMER: Now, what is it about this situation that is somehow not inspiring confidence in the market?
Mr. WESSEL: Well, the market clearly is not cheering President Obama or the Federal Reserve's financial rescue. As you point out, just since the first of the year, the stock market has fallen so much that we've lost $1.8 trillion in wealth in just a couple of months.
Some of it is a skepticism that the government has the right medicine for what ails the economy. But some of it also reflects the fact that the economy continues to disappoint us on the downside. And now there are economists saying that the current quarter, the first quarter, could shrink at an even more rapid rate than the economy did in the fourth quarter when it fell at 6.2 percent.
So, they're not satisfied with the medicine, but they're also really worried about the patient, the underlying economy.
WERTHEIMER: Now one of the things that the federal government has tried to do and started trying to do before the first of the year was shore up banks in order to unfreeze credit, to get lending going again as a way to stimulate the economy. Now the government has unveiled details of a new lending plan.
Mr. WESSEL: That's right. After about three months of work, the Federal Reserve and the Treasury finally are launching an experiment where the Fed is going to lend up to $1 trillion to hedge funds and other investors at very sweet terms to try and get them back into the market where securities markets lend money. Then it goes to consumers for auto loans and small businesses and other -credit card loans, trying to get this moribund market going again so consumers and businesses can borrow and spend.
WERTHEIMER: Why isn't it enough to strengthen banks as an institution?
Mr. WESSEL: Well, that's a good question. You know, before this current crisis began, we'd seen an explosion in something called the shadow banking system -lending that goes on between investors and brokerage houses and ultimate consumers. And 40 percent of all consumer lending was happening outside the banking system in this securitized shadow banking market, and that market has shut down.
So what the government's trying to do is both get the banks lending again and restart the securitization market so we can get the engine of the economy firing on all cylinders again.
WERTHEIMER: But will something like that work if consumers and businesses are -I mean, everybody is frightened. Are people going to go and try to get loans, given how weak the economy is?
Mr. WESSEL: Look, there is two problems here. One is that people are really frightened and so they're reluctant to borrow because they want to save more in case the economy gets worse. So the demand for loans is awesome. And then also lenders of all kinds are right to be skeptical. Do they want to make a whole lot more bad loans into a sinking economy and get into an even deeper hole?
So the very delicate balance the government is trying to walk here is to get banks to make and investors to make loans to people who deserve them, who can pay them back without making so many foolish loans that we end up with a bigger hole two or three years down the road. It's a very tricky balance.
And one of the reasons why there's so much uncertainty in the markets is no one is quite sure that they got the balance right.
WERTHEIMER: David Wessel is the economics editor of the Wall Street Journal. Thank you very much.
Mr. WESSEL: You're welcome, Linda. Transcript provided by NPR, Copyright NPR.