Before the stock market and the broader economy can return to something that looks like normal, banks must start to lend the billions they are getting from the U.S. Treasury's Troubled Asset Recovery Program, says Wharton finance professor Jeremy Siegel in an interview with Knowledge@Wharton. Banks should not be trying to improve their balance sheets by calling in loans to companies that have always paid on time, he adds. Siegel also discusses the government's rescue of Citigroup and the proposed bailout of the U.S. auto industry.
An edited transcript of the conversation follows.
Knowledge@Wharton: Professor Siegel, thank you so much for joining us today. We would like to talk first about the stock market, of course, beginning with its wild gyrations over the past few days, all driven by one news event or another. Are news headlines going to drive the market every day for the foreseeable future?
Siegel: Let's put this in context. Last week, Wednesday and Thursday, there was a meltdown in the commercial real estate market. We know about the meltdown in residential real estate. That's been going on for several years. But everyone said, "Commercial real estate is generally holding." Well, it wasn't holding. And what we saw was, first of all, a frightening drop in real estate investment trusts, the REITs. Unbelievable; a 67% drop, in approximately two months. And prime triple-A commercial mortgages were beginning to sell at $0.70 and $0.80 on the dollar. This is prime lease stuff, in the best cities in the United States. Now, all banks, including Citi, and particularly Citi, have a tremendous amount of these mortgages. And when they were looking at what was going on to the price of these mortgages, they said, "Citi is insolvent." And not only that, they sent all the banks down. There was a panic. And basically, they began working on it last Friday and over the weekend.
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