Peter Peterson

No More “Running on Empty”

VTR Date: November 7, 2008

Peter G. Peterson discusses the financial future of the country.


GUEST: Peter G. Peterson
VTR: 11/07/2008

I’m Richard Heffner, your host on The Open Mind.

And, in a way, this program, recorded three days after Barack Obama was elected President of the United States by both very substantial Electoral College and popular votes, is a continuation of an Open Mind conversation we brought you six months ago.

That, of course, was somewhat before our economy — and then the world’s, too — seemed in meltdown, with housing markets in dizzy decline, stock markets everywhere in total disarray, and our banking structure geared for unprecedented governmental involvement.

Yet our program’s warning was clear, for my guest then — and again today — Peter G. Peterson, entrepreneur, banker, industrialist, philanthropist, former Secretary of Commerce — has long since warned that America was — is — “running on empty” (that wonderfully evocative book title he had used some time back).

And to match his words with deeds, my guest had just created the Peter G. Peterson Foundation with a billion dollars of his own making … hoping that it might convince Americans, young and old alike, that we (and our government) can’t any of us really over time spend more than we make — saving little or nothing — that we can’t any longer sustain ourselves on an unsustainable path, that we can’t keep “running on empty”.

To be sure, lest I seemed to be pressing him into partisanship in an already overheated presidential campaign year, I didn’t then ask Pete Peterson about party platforms or pledges or candidates.

But now we’ve cast our votes … and I feel free to ask Pete Peterson what he believes President-Elect Obama must do now.

What’s my guest’s own agenda for America …and appropriately for the new Peterson Foundation. What do you recommend, Pete?

PETERSON: Well, let’s, let’s break that down in the short term and the long term. It’s perfectly obvious that the economic crisis is an overwhelming problem today. And any President would have to address that.

I would think that the elements of the appropriate program would include the following. First of all, it’s very important that we motivate the whole world to do something. This is a global recession.

And for a lot of reasons we can discuss, I happen to think it’s going to be much longer and deeper than most recessions are.

Since it’s global, it should take coordinated global action. So I would have thought one of the early steps should be to try to get the rest of the developed nations in the world to engage in some stimulus, some fiscal stimulus to their economies, so that we stimulate the world economy and not just ours.

Secondly, I think it’s important to look at the current situation and try to understand what the elements of the problem are. It’s my theory that this will likely be a consumer led, or a consumption led recession.

Consumption is over 70% of this economy. And I have several reasons for believing and today’s retail sales numbers would seem to support that … and auto sales … that the consumer is going to … left alone … would be inclined to spend much less. Why? Well, as you pointed out, we have no savings, we have a zero savings rate.

Secondly, we are borrowing, at the consumer level, at historic levels.

Third, much of the spending that we’ve been doing over the half … last seven, eight years … has been stimulated by people refinancing their houses. Because the value of the houses were going up. And with American optimism, we assumed they’d go up forever. The houses were heavily leveraged … many of them had very little money down, or, or no money down in some cases. So they went for it.

But now their net worth, which used to … the house used to account for about two-thirds of the net worth of most homeowners has fallen dramatically. So people are far less wealthy than they used to be.

So spending your wealth, or the wealth effect, as the economists used to call it, is far less likely.

Credit card debt is at a trillion dollars and it is very high level. And something like 30% of credit card debt today are sub-prime type credit holders. In other words, quite risky.

So I think we’re facing a recession that will be led heavily by the consumer.

Now that was particularly true for product categories that require financing. Because, as I’m sure you must know, lending has almost frozen.

Now, unfortunately, in my opinion, while the broad thrust of what was done recently was appropriate … namely putting capital in banks.

The theory, Dick, was the following. That banks tend to lend … they leverage their equity about ten to one, generally. And the theory was that if you gave banks capital, it would have a multiplier effect on lending.

Unfortunately, unlike France … which tied lending requirements to the capital …

HEFFNER: Officially.

PETERSON: Officially. There, there were no lending requirements here. And early on, and I hope this changes, some of the biggest banks have indicated they don’t intend to increase lending.

Now lending is extremely important to the growth of this economy. And experts who know a lot more than I do, tell me that they’re expecting lending at the current rate to only go up about 1%, whereas normally it goes up 9%. That alone could result in a reduction in the GDP of 1 ½% to 2%. So any of the products that require financing … like autos, like durables and other products, are likely to be in a pretty tough period.

So what do you do about all of this is the, is the issue? Aside from a global, you know, program. There are only a few things you can do at this point.

Number one, you can put more money in the hands of people that really need it. For example, by extending the unemployment type revenues for individuals.

You can put it in infrastructure and lord knows our infrastructure is in tough shape. That tends to promote jobs.

HEFFNER: By infrastructure you mean roads …

PETERSON: I mean highways and buildings of various types in construction. And that tends to result quickly into jobs. Because you obviously have to hire people to build whatever you’re building.

A new element in this whole picture, because remember that the states and the cities also have some of these long term pension programs that you and I have discussed. And most of them were pretty well funded.

However with a stock market down 40%, 50% their funding, funds have dropped dramatically. And, and for that reason for the reason of recessions, and here in New York we’re very much aware that a lot of revenues of the City of New York comes from Wall Street. And it’s just perfectly obvious that the revenues are going to fall dramatically.

So I would not be surprised to see some money go directly to states and cities. Now among the most controversial steps, in my opinion, will be what to do about specific companies.

And as you know the auto companies are in Washington right now. And that’s going to present some rather interesting policy questions. The most obvious being, “If you’re going to help the auto industry, you know, why don’t you help the appliance industry?”

HEFFNER: Pete, what’s your answer to that question?

PETERSON: (Laugh) Well, I think it’s an immensely tough one. And it will be solved largely politically, I would guess. Because there’s so many jobs involved in the auto industry. And it’s part of the program, of the environment of getting cars built that are much … not only more fuel efficient … but are more environmentally friendly than they are now.

HEFFNER: So they have a leg up in Detroit?

PETERSON: They do. Now, the underlying problem that caused this horrible meltdown, as you will recall, was the drop in housing prices. And they’ve fallen 20% and that, of course, made all of these mortgage related securities worth much less and caused these huge losses.

It is now predicted by some experts that housing prices have still another 10% to 15% to fall, which has all of these effects I just mentioned. On the net worth and people’s ability to get home equity loans and, and all that sort of thing.

So I would expect another part of the package to try to do something to limit foreclosures. Because a lot of foreclosures have two effects. There’s a direct effect that we’ve already covered, but there’s a psychological effect. There’s a … you know, it, it has a very negative effect on confidence. So I would expect that to also be part of the program.

Now there are a half a dozen ways of doing that. You can say you can’t foreclose. Or you can do what was suggested during the campaign by several of the candidates, but don’t be surprised if there’s something in there that tries to stabilize housing prices.

Because if housing prices were to fall another 10% or 15% it would greatly aggravate our domestic problem.

HEFFNER: What’s your prediction … that these changes will be made?

PETERSON: I think you’re going to see a big package of changes and people are going to forget they’re typical concerns about deficits. I’ve been concerned about deficits for some time. But I’ve … basically, the long term picture.

Short term we’re now facing a number that could be well around a trillion dollars. Now that’s a thousand billion dollars. You remember te Dirksen said, “a billion here and a billion there”?

HEFFNER: (Laugh) Begins to add up … huh!

PETERSON: Now we’re saying a thousand billion here and a thousand billion there. And it’s real money.

But I think the concerns about the economy … and this morning they reported 240,000 jobs lost in October. 6 ½% unemployment rate. Rising very rapidly. I think you’re going to see a big package of stimulus measure.

HEFFNER: Pete, a year ago … six months ago … would you have expected Pete Peterson to be saying these things?

PETERSON: Well, sometimes it’s better to be dumb lucky, you know, then, then smart.

I got concerned, frankly about … at the time a Blackstone offering went public … which is most of the money that I’m using for my Foundation … and I took a look at the housing picture. And my gut started churning.

We had the following set of things going on in the housing market. Housing prices had gone up enormously, as you know. 10% even up to 15%. People were taking out these loans that were no money down, adjustable rate. And then I looked at the savings rates and they were falling and falling and falling. And then I looked at the borrowing levels and they were at historic, you know, kind of levels.

And I said to myself, what if housing prices don’t go up? And what if people are stuck with these trillion … multi trillion dollars worth of these mortgage assets which are tied to the value of, of houses?

So I was lucky enough to take this money and put the vast majority of it into Treasury bills. So I’ve been quite …

HEFFNER: Excuse me … “lucky” isn’t the word. “Smart” is the word.

PETERSON: Well, I don’t know about that. But … no, I’ve been concerned for about a year that we were in fantasyland. And while the foundation is overwhelmingly concerned with the … not the sub prime crisis, but what we call avoiding the Super-sub-prime crisis, which are the long term liabilities.

Dave Walker who’s the great guy that runs the foundation was Controller General of the United States. I asked if he could put together what the magnitude is of all of the government liabilities and much more important … the unfunded promises that we’ve made. That are off the books. You know, that are kind of hidden from view. And all you hear about now is that we have $10 trillion dollars worth of public debt.

The actual total of liabilities in unfunded promises like Social Security and Medicare and so on … are a stunning $53 trillion dollars. That’s three or four times the whole gross domestic product of the United States.

You couldn’t possibility borrow that much money if you tried. If you tried … if you had to raise taxes on our children and their generation, they’d have to double. Which is unthinkable … politically, economically, morally.

So the second part of what I hope this next President … to return to your original question … is not get so … not get so preoccupied with the short problem that we let an incipient super-sub-prime crisis, namely these unfunded promises that are now about to hit us because the Boomers, 78 million strong … twice as many as the previous generation are now beginning to retire in numbers.

So it would be how do you meet the short term problems, emergencies, which we must … and start planning for the long term.

HEFFNER: Let me ask you though whether you find a … at least on a psychological … well let’s say a psychological, a philosophical, a political science level … the difficulty of carrying those two buckets at the same time. When we’ve spoken before … when you wrote Running On Empty … it was so important to hear Pete Peterson talk about what we must do now to avoid where …


HEFFNER: … we are now. Can you do … can you do both? Can the foundation recognize what is needed today and what is needed for the long future at the same time?

PETERSON: Well, you’re too courteous and kind to state the question the way some people state it … which is “Peterson have you lost your mind?”

HEFFNER: (Laughter)

PETERSON: Aren’t you being terribly presumptuous? Aren’t you being foolhardy to think you can tackle the long term issues? And I was presumably educated in the University of Chicago. And George Stigler, Nobel Prize winner was one of my professors. And he said one day if you have an alternative, you have no problem.

And I thought a bit about that, Dick. And I looked out to the next ten years or 15 years … I have five kids and nine grandchildren. And I said to myself, how am I going to feel on my death bed, or wherever I am … or how would I feel looking back … knowing that these problems are extremely serious and do nothing about them. And wouldn’t that be a terrible feeling to have?

So I don’t think, you know, I have an alternative. Now there’s some reason to be optimistic. The first is that I think the sub-prime crisis has awakened Americans to the fact that you can’t keep forgetting and denying the future indefinitely.

And I’m now stopped by people on the street, saying … you know, are you Pete Peterson, by God you were right, you know, we should have, you know, done something about these problems.

So what we’re proposing, because it’s totally unrealistic to think that a President is going to take on all these short term problems and also start talking to people about Social Security and Medicare and saving more and doing all those things … is that we think he should appoint a special kind of bi-partisan commission … cause this problem will never be solved except with Presidential leadership and bipartisanship.

And everything must be on the table. We have now this ideological divide, you know. Where the Democrats are typically characterized as “they never want to reduce benefits or cut spending”. And the Republicans are characterized … “they won’t consider any tax increases”.

Well the truth of the matter is that while most of what we’re going to have to do is going to be through benefit reductions that still honor the safety net for the people that really need them, but reduce them for the rest of us like you and me, if I may say so.

And propose a commission where everything is on the table … made up of highly prestigious people including people like Paul Volcker, you know, and Bob Rubin who are … kind of transcend partisan … and have them come up with recommendations on what to do about these programs, what to do about revenues, what to do about how to increase savings, which I think is absolutely central and handle it the way we now have military base closings … which as you may recall …


PETERSON: … if you try to close one or two at a time … you know the Senator from that particular district raises hell and you can’t do it … so you … they have to vote on the whole, the whole package … having agreed in general they want to discuss … I mean they all agree on the need for closing some bases.

Now the issue that I worry the most … that could trigger a crisis are the huge amounts of our balance of payments and trade deficits and our savings deficit and the amounts of money that we’re borrowing now from abroad are just totally unsustainable.

There’s a Peterson Institute in Washington, poorly named, on International Economics and I’m now having them do projections on what this country looks like in 10 years if we continue borrowing this much money, you know, from the Chinese and the Japanese and the Mid East and so forth.

And it’s a totally unthinkable position. So I keep mentioning savings … in the old days, Dick, we used to rationalize our occasional fiscal irresponsibility … moves, by saying we owe it to ourselves. Well, we don’t owe it to ourselves anymore because we aren’t saving anything.

We owe it to foreigners. And that brings about huge economic risks. And what are the economic risks? That at some point these people lose confidence in America and decide they’re not going to finance these deficits any more. And it is isn’t that they’d have to dump all that they had … if they just decided …


PETERSON: … not to finance the current ones …


PETERSON: … it would raise hell with us. It could also involve geopolitical risks. You and I are old enough to remember Dwight Eisenhower and during that period of time you may remember the British wanted to make and did make a military move on the Suez Canal. We held a lot of British pound securities. And we quietly got ahold of the Brit and we said we strongly objected to this. And I hope you don’t put us in the position, but we’re prepared to do it, we prepared to dump these securities which would, would have had a devastating effect on the British economy.

HEFFNER: Who’s in a position to do that to us now?

PETERSON: Well the Chinese could do it. The Mid East could do it. Anybody could it. And I was on a program last night with Madeleine Albright and, and I was saying to her the foreign policy people have get integrated with the economic people and start thinking about the political risks that are involved in being this dependent on foreign capital.

So that commission should deal with what I consider to be a fundamental problem in America … “how do we get people to save more?” Because we’ve been brought up, you know, that we can have it all and we can have it now and we’re entitled and we’re Boomers and we don’t have to save and all that sort of thing …

HEFFNER: The fact of the matter is, Pete, you and I were brought up to believe to the opposite, that we had to save … unfortunately we’ve brought up new generations … obviously we’ve …


HEFFNER: … taught them they didn’t have to. We have a minute left. Let me just ask you whether you think that the conduct of the late political campaign indicates that there is going to be a willingness for us to come together to do what you think we must do?

PETERSON: Well, the politics are such that Dave Walker and I met with the leaders of the Senate and the House and we were, on the one hand, very happy to hear that they weren’t denying the problems we were talking about, they said, “You guys couldn’t be more right. They are huge and we’ve got to do something.” But the politics are terminal. The politics are toxic and asking people to give up something, in our opinion, is suicide, you know. And people don’t like to commit suicide.

HEFFNER: That was before election day …

PETERSON: It was before election. What I think now is with a President with a big mandate, having gone through the sub-prime crisis, if we could get this put together in a bipartisan way and let this Commission function for six months or so while we work out these other things, and then later, when the country has some confidence again … we start tackling the long term problems. That is, to me, the best scenario possible.

HEFFNER: Pete Peterson, as my mother would have said, “from your lips to God’s ears”. Or to the politicians’ ears. Thank you so much for joining me again. It’s not a pleasant topic in a sense, but you still bring to it an optimism and “must-do” that I particularly appreciate.

PETERSON: Thank you, Dick, very much.

HEFFNER: And thanks, too, to you in the audience. I hope you join us again next time. If you would like a transcript of today’s program, please send $4.00 in check or money order to The Open Mind, P. O. Box 7977, FDR Station, New York, New York 10150.

Meanwhile, as an old friend used to say, “Good night and good luck.”

N.B. Every effort has been made to ensure the accuracy of this transcript. It may not, however, be a verbatim copy of the program.