Horizon, Host: Ted Simons

October 1, 2008


Host: Ted Simons

Financial Bailout

  |   Video
  • ASU finance professor, Herbert Kaufmann talks about the revised plan for rescuing U.S. financial markets.
Guests:
  • Herbert Kaufman - Professor of Finance, W.P. Carey School of Business, Arizona State University
Category: Business/Economy

View Transcript
>>Ted Simons:
Hello and welcome to "Horizon." I'm Ted Simons. As we tape this program, the US Senate is preparing to vote on a revised Financial Bailout plan. It still gives the Treasury Department access to about $700 billion to buy and re-sell troubled securities. What's new is a tax relief package and a higher limit on Federally Insured Bank deposits. Joining me to talk about the plan is Herbert Kaufman, a former economist for Fannie Mae, who is now a professor of Finance for Arizona State University's WP Carey School of Business. Good to have you back on the program. Thanks for joining us.

>>Herbert Kaufmann:
Thank you, Ted. Nice to be here.

>>Ted Simons:
The underlying concept of what will be voted on. And, again, as we are taping this, they are getting ready to do this. The underlying concept, pretty much the same as what they turned down before?

>>Herbert Kaufmann:
Pretty much. It’s still the purchase of bad or questionable assets off of financial institution balance sheets. There are more insurance provisions, and the use of insurance, and the purchase of insurance from the treasury to guarantee bad assets as well. The core function of this is really to remove assets that currently are not saleable to free up funds to financial institutions such that they could start the credit process going again. I think when we talked last time, I expressed some concern about the hang-up in the credit and lending process that's taking place. That has only gotten worse as the House failed to pass the legislation, and as markets continued to deteriorate. That is a major issue. And this is designed to help that primarily.

>>Ted Simons:
I was going to ask you that. What was lost by Congress not acting a couple of days ago, and even if they act now, what was lost?

>>Herbert Kaufmann:
Well, I’m not sure there was a loss if the bill comes out in some improved state. There was no question that the negotiations that took place surrounding the House bill will probably pause with regard to oversight, with regard to spreading authority and so forth. I think, though, at that point in time, the markets were looking for a kick that the Treasury, the Congress, the Executive understood the dimensions of the problem, and would help to free up the financial markets. I think at this point in time, we need to pursue this. I think that one of the issues that has kind of been lost in all of this is that this is designed to help the economy from falling over in an abyss. Although it's been sold, and terribly from a Public Relations point of view, as a Wall Street bailout for fat cats. This simply is not the case. The fact that some folks on Wall Street may benefit, although a lot have already suffered, and people maybe feel justifiably. I’m not going to get into that, perhaps so. But the fact is that what we are trying to do is prevent the economy from losing its lifeblood, which is the financial system. We already see signs of that.

>>Ted Simons:
Was it a mistake to call it -- I don't know who first called it this, but it seems it be stuck here, a “bailout” as opposed to a “rescue plan”.

>>Herbert Kaufmann:
Especially the Wall Street Bailout. It should have been called, in my view, an “Economic Recovery Plan”, and that would have been more effective not just as a marketing ploy, but actually in describing what was necessary to be done. When credit dries up—and we already have evidence of this. Car dealers that have closed already, and the idea that more will. Other institutions, companies that employ workers that are having difficulties securing credit, all this is as a result of the financial system being restricted and freezing up and people not being willing to offer loans and credit freely and availably.

>>Ted Simons:
This latest plan, higher Federal guarantees, higher Federal insurance for bank deposits, good idea?

>>Herbert Kaufmann:
I think it's an excellent idea. For most people, it's symbolic. I don't know a lot of people, and I suspect you don't, that have more than $100,000 in a bank account, or more than $250,000 in Ira that is at a bank. They may have other accounts as well. However, raising it to 250,000 suggests that the government is confident that the banking system will be maintained. I think Federal Deposit Insurance, afterall, came in in the Great Depression. It stabilized the banking system. We have not had a really significant destabilization of the banking system since that time with FDIC insurance. The last time it was raised to $100,000 was 30 years ago. I don't know if anybody knows anything that is still price it was 30 years ago.

>>Ted Simons:
OK. Another aspect of the plan is tax reliefs, in a variety of forms. Make sense to put tax relief to the bill and add to the burden of the government?

>>Herbert Kaufmann:
Well, I don't think so at this point, and I have to say that they are talking about the Alternative Minimum Tax, some Business Tax relief. I think that's purely designed to give cover to some people in the House. I think Senate's going to pass this, but some people in the House that will be able to latch on to one thing or another. I don't think in any case that those belong in this bill, nor do a number of other things that tend to make their ways into bills of these kinds. The major thing to keep our focus on is that can't be dealt with independently or necessary to secure the votes. But the main focus is this relief that will come forward.

>>Ted Simons:
Last question. We hear a lot about “mark to market”, and SEC perhaps relaxing the rules that came into effect because of abuses by Enron and others. First of all, very quick priner, if you could. “Mark to Market” means?

>>Herbert Kaufmann:
“Mark to Market” means what is it is actually worth now in a sale. The problem we have right now is a lot of these assets are not saleable. So that banks are keeping them on their Books at what they paid for them or what they can argue is a fair value. Fair Value Accounting has been around for quite awhile, and is still existing. Presumably when you “Mark to Market”, you mark to a fair price. The dispute comes in about what a fair price actually is. What you can sell it for is not the question, because you can’t sell many of these things now. So, the question is is it 60 cents on the dollar, or 10 cents on the dollar? That makes an enormous difference with respect to the value of bank balance sheet.

>>Ted Simons:
Open the door for abuse?

>>Herbert Kaufmann:
Potentially. It sure does. As a finance person, I have to argue--although I’m not an accountant--that I feel very comfortable with Mark to Market” accounting. I do understand some of the exigencies of the situation. And I think what has to happen is that reason has to prevail such that when the assets are valued, they are valued at fair value, which is part of what the standards really are.

>>Ted Simons:
I lied. Last question is this. We were tiptoeing around a recession before all this blew up. What does this do to the economy in general? It was bad before all this. How bad is it now?

>>Herbert Kaufmann:
I think it’s getting worse. And I think that we're not sure yet if this will even work in enough time. My guess is, and it's only a guess, we're in for an additional slow down, additional recession as we go forth. The question is: are we in a recession deeply and very long period of time, or less deeply or in a shorter period of time? In either case, it's not a great situation. but I’d rather will be in the shorter recession and a less deep recession than the other, and requires the financial system to be unclogged. There’s no question.

>>Ted Simons:
Very good. Thanks again for joining us. We appreciate it.

>>Herbert Kaufmann:
My pleasure.

University Tuition

  |   Video
  • Regent Fred DuVal talks about the Arizona Board of Regents recent adoption of maximum parameters that university presidents must follow when requesting tuition increases.
Guests:
  • Fred DuVal - Arizona Board of Regents


View Transcript
>>Ted Simons:
In December, the Arizona Board of Regents will set next year's tuition for State Universities. Last week, at its meeting in Flagstaff, the board adopted maximum parameters for tuition requests from University Presidents. For instance, ASU may ask for no more than a $598, or about a 10.5% increase. NAU may ask to raise tuition by as much as $811, or nearly 15%. And the University of Arizona request would be capped at $726, or an increase of just over 13%. Regent Fred Duval will have more on that in a moment, but first, here's what the President of the Board of Regents had to say about tuition, just before the board voted on the new parameters.

>>Regent President:
I find it interesting that in the time that the regent and I have been on the Board of Regents, tuition has gone up. You told me the other day. You said 300%.

>>Regent: I said a lot.

>>Regent President:
I’m not sure it's 300%.

>>Regent: I am. [laughter]

>>Regent President:
A lot. I'll settle for a lot. But I find it interesting that in that same time period, we have become more affordable. We have become more accessible. The student, average student loan and the statistics are questionable, but the average student loan has not gone up. As long as we can take and maintain the accessibility, affordability of our universities, I’m not really that concerned about what tuition is as long as we can do what I think we're here to do, and that's to see that higher education is available to every qualified student in the State of Arizona.

>>Ted Simons:
Joining me to talk about university tuition is Fred Duval of the Arizona Board of Regents. Good to have you back on the program.

>>Fred Duval:
Thank you, Ted.

>>Ted Simons:
Tuition increases: why are they necessary?

>>Fred Duval:
This is, of course, the most painful thing we do on the Board of Regents. It’s so difficult because we are mindful that the cost of tuition goes up much faster than the cost of living, which the average student graduates from our system with $18,000 in debt. It’s a terrible burden, and a lot of our students can't stay in the system, because of the financial pressures. So it's hard. The answer why is complicated. It is costs, to be sure. Costs are rising. The big factor is that the--we have a chart that shows this. The amount of State support over the last 20 years has steadily declined. There have been better years than others. We are roughly, as a percentage of the State Budget, we are half of where we were 20 years ago. So we got to make up for that, and what ends up happening, and you can see there's a direct correlation between the loss in State Support for the Universities, and the rate of increase of tuition going up. And in fact, they are a mirror image. Now we find ourselves in the second year of a tougher State Budget. We’ve tried to keep a cap on tuition. But the cost, the system has resource needs, and with State Support going down, and in fact being cut, the pressure is on us to raise the tuition to try and make up the difference.

>>Ted Simons:
That said, are students being prized out of a University education in Arizona?

>>Fred Duval:
Some say we are. I think it's important to separate sticker tuition what's in the book and next tuition after financial aid. It's $160 million institutional financial tuition goes to students. The amount of out of pocket cost to the average Arizona student in the university system is $2,000. We have a Board follow policy reflected in the numbers we saw in the opening that we will not let tuition in Arizona go above the top of the bottom third of the 50 comparable institutions. The cost of higher education is growing every where in the country. Ours is going up as well. We hope to be a great bargain.

>>Ted Simons:
Correct me on parameters. The low end is cost of living. High end is higher pier and the middle is literally the middle. The higher end was chosen, correct?

>>Fred Duval:
Correct.

>>Ted Simons:
Because of the situation we are?

>>Fred Duval:
We faced $50 million in cuts last year and mindful this is Arizona. The growth rate we have 5,000 plus new students in our system. We have a growth rate combined with budget cuts and as a result the financing gap is higher.

>>Ted Simons:
I’m fascinated by the concept of setting parameters perhaps future endeavors along the lines. Is that different?

>>Fred Duval:
The Presidents have come to us with the recommendations that we have approved and tinkered with them. We have proactively said here are some considerations that need to be part of the modeling. Resource pressures on the institutions is a driving component. Cost of living, student aid, affordability, and accessibility these other factors from a student's point of view need to be part of the mix. Let's see if we can have the parameters to bring up the data before us when we make a decision.

>>Ted Simons:
Is the student's point of view instigate or push the parameters?

>>Fred Duval:
Yes. The students come to us with stories about trying to manage two or three jobs to stay in the system. Tuition is only a piece of the puzzle. The cost of the attend dabs is dormitories and myriad of expenses and textbooks. The overall cost of participation in our universities is much, much higher as a result.

>>Ted Simons:
Where do Arizona Universities rank as far as tuition costs generally?

>>Fred Duval:
I have a specific idea. We are below the top of the bottom third which means we are 42nd, 43rd depending on the given year of comparable institutions. Be mindful that we compare that metric against institutions that aren't growing with more stable populations. We are absorbing the growth notwithstanding that we are trying to cap tuition at a competitive rate to keep our student here and accessible. That's expensive.

>>Ted Simons:
the concept of guaranteed tuition. Talk to us about that. I'm not sure how that works or is working.

>>Fred Duval:
what we have heard from parents of students and students they want to be able to plan the costs so they know what jobs to take and how much money they need to get through. Secondly one of the biggest challenges in the system is retention and persistence. That's to keep them through school through completion and graduation. We thought by capping tuition saying here is your total cost of your degree if you go through if four years. It has two effects guarantees predictabilities and financial incentive to create it in four years.

>>Ted Simons:
the guaranteed tuition.

>>Fred Duval:
we go on hearing and go on telecast and hear from parents and students and a foreign view for us to consider and look at a lot of data and ultimately vote on the upcoming year's tuition at the December meeting.

>>Ted Simons:
good it have you on the program.

Vice Presidential Debate

  |   Video
  • ASU Political Science professor and department chair, Patrick Kenney talks about the Vice Presidential candidate debate.
Guests:
  • Patrick Kenney - Chairman, Political Science department, Arizona State University


View Transcript

>>Ted Simons:
tomorrow, evening Alaska Governor Sarah Palin and Senator Joe Biden of Delaware face-off in a debate of the candidates for vice president. Here to tell us what to expect is Professor Patrick Kenney, chairman of the political science department at asu. Good to see you again. Thanks for joining us.

>>Patrick Kenney:
Happy to be here.

>>Ted Simons:
the debate. The major focus is on Sarah Palin. Are exceptions so low with her--granted either coming from the media or general consensus--are they so low, it's impossible for her to fail?

>>Patrick Kenney:
I think they are so low following the set of interviews she did with ABC and CBS and heavyweight reporters and anchor-people. That drove the expectations so low. It will be so low if some of the response to Katie Couric the uniform opinion that she's struggling.

>>Ted Simons:
yet exceeding expectations could that in and of itself be enough?

>>Patrick Kenney:
I think it could help. She could talk fluidly of the major issues of the times and help they are dramatically especially over the last two weeks.

>>Ted Simons:
A lot of supporters have said the McCain campaign put too much of brace on her. Let Sarah be Sarah. Wise idea?

>>Patrick Kenney:
I think it's a wise idea. I could agree. I don't understand why she wasn't allowed to campaign especially in red states which means a lot of different press and basically a friendly press corp. It's unprecedented today lockup a vice presidential candidate like that.

>>Ted Simons:
what she has to do is show a little more than just reciting things and these sorts of things and a mastery of some of the subjects.

>>Patrick Kenney:
Right. She has to sound like a person that would potentially wind up being the president of the United States. She will have to be more fluent and riser in her answers. She can't look like a student who jammed for an exam.

>>Ted Simons:
Joe Biden, what does he have to do?

>>Patrick Kenney:
I think Joe Biden, there's talk if he mishandles this, he could hurt the democratic ticket. I don't think he will do. That I think Biden’s task is easy. He can focus on McCain and bush and stay away from the Palin controversy.

>>Ted Simons:
does it help or hurt either candidate the style of debate. They are not going to be able to go after each other.

>>Patrick Kenney:
I think that helps Palin because they probably doesn't need a back and forth with the US Senator. He has a limelight and chairs he's had in the senate. I think he will be comfortable.

>>Ted Simons:
There’s a little dance going on with Biden I would think. He can't come off as attacking her, can he?

>>Patrick Kenney:
Probably not, especially if the attacks seem gratuitous. He will aim with comments to him and put them on the presidential level and talk about McCain, link it to bush and stay away from Palin controversy.

>>Ted Simons:
The media has had a field day with Sarah Palin. Can that boomerang? Can the Sarah Palin and McCain campaign use that to their benefit? I know there's a little bit of press bashing. Let's say she doesn't do all that well, if the press comes out and attacks her, how does that play in all of this?

>>Patrick Kenney:
They have been working against the press. They the McCain Republican Party has been working against the press. They will do that irrespective because that's their pitch to say away from the press especially on the east coast. I think they will continue with that. Will it boomerang on people who haven't quite made up their minds or democrats who are struggling with the choice? I think the boomerang works just fine with the base Republican Party. That's probably sewn up. They will vote for the McCain-Palin ticket.

>>Ted Simons:
The moderator Gwen Ifill writing a book on Barack Obama. Concern?

>>Patrick Kenney:
After the debate in the mid-1970s the debates moved significantly non-partisan as possible. This is something they probably wouldn't like.

>>Ted Simons:
The bailout plan the taping time and senate is just about to vote on this thing. Let's say it passes the senate for now and house does the same thing eventually. Winners and losers in all of this?

>>Patrick Kenney:
The clear winners if we believe everything the economists tells us--and I’m not a economist--that overall we will be winners and short and long run and some of the credit will be used to keep the economy afloat. The losers are the US Congress and Bush Administration on the political scale. The US Congress is not a popular place, and overall the population is having trouble digesting this as a positive. I think they will look to the US Congress and say they work fine with Wall Street but not so well with the regular folks.

>>Ted Simons:
what do you think about the message, the President, Treasury, two major candidates and everyone saying get on board. No one got on board, what happened?

>>Patrick Kenney:
Not enough got on board. For some reason we don't know the internal dynamics and clearly the leadership and miscalculated the votes especially on the republicans side. They believed the Republicans would deliver 50, and Democrats would deliver 50. The amazing thing is the president can't deliver 50 of the republican confidence.

>>Ted Simons:
Did leadership to the President to Congress and did they do a good enough job? People don't understand what this is about?

>>Patrick Kenney:
People do not pay attention to everyday aspects of politics. They are too busy with the daily lives. Something like this complex dumped on the US population Late in the week and supposed to have it done by the following Monday. That would take a tremendous job to educate the population in that short of time. No one did it well. I'm not sure anyone could have. Maybe a Franklin Roosevelt or Ronald Reagan could have made it come through.

>>Ted Simons:
What kind of impact does it have on the presidential race?

>>Patrick Kenney:
The bailout?

>>Ted Simons:
Yes.

>>Patrick Kenney:
The bailout has a great turn to the Presidential race. All the models show that when the economy is in this bad a shape, the incomers are hurt and I think McCain-Palin are hurt the most.

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