Buyers Win or Lose with Rate Cut?

FARAIA CHIDEYA, host:

This is NEWS & NOTES. I'm Farai Chideya.

Today, the president unveiled the largest budget proposal in history. The 2009 budget is for $3 trillion in spending. It would increase the defense budget and cause a surge in the federal deficit.

For more, we've got Keith Reed. He's a reporter for the Cincinnati Inquirer. He also does a finance blog for BET called Dollar Out of 15 Cents.

Hey, Keith.

Mr. KEITH REED (Reporter, Cincinnati Inquirer; Blogger, Dollar Out of 15 Cents): Hey, Farai. How are you doing?

CHIDEYA: I'm doing great. So let's talk budget. It would trim health program such as Medicare, cut funding for after-school programs. How does what's called social spending fair overall?

Mr. REED: It fairs very poorly. I mean, you see the trimming of many programs that Congress has fought pretty hard for, that would help the least among us in this economy and really in any economy. I mean, you look at things like health care spending for youth, health care spending over all, Medicaid programs. You also look at some things like funding for infrastructure, public housing, all of those things. See cuts under president's proposal. So it would probably harm many people who are least able to help themselves in an economy like this.

CHIDEYA: Who gets the better side of the bargain? What demographics seem to do well in this budget?

Mr. REED: So - it seems to be the same demographics that benefitted from the president's tax cuts from the very beginning of his term. I mean, we are looking at some things that the president wants to see happen that sort of benefits the upper-income - upper-tax brackets.

The president talks about this being a, quote, unquote, "pro-growth budget," which is something that he said repeatedly throughout his term when he's pushed for things like, you know, like his tax cuts, for example. He says, you know, these are pro-growth initiatives.

It almost in a lose way Harkin is back to the era of Reaganomics when you talk about trickle down economics. If we do things for the wealthy, if we do things for the business owners, for the entrepreneurs, if we do things for corporations that make it easier for them, then those corporations didn't spend money and that increases growth and that increases jobs, and then increases wages. The problem with that is obviously, that over the last several years, we saw many corporations and many of the wealthy individuals increase their balance sheets, their net worth's and their profits without much of that coming back to the average American.

CHIDEYA: Now, let's talk a couple of Ds: deficits and debts. This budget would throw the deficit into the $400-billion range, up from $162-billion deficits - in deficits last year. Now, remind us about the difference between a deficit and a debt, first of all.

Mr. REED: Well, the deficit is essentially going to be the difference between what the country owes and what the country is bringing in, and debt is just one side of that balance sheet. So the debt is what the country owes.

The deficit is going to be the difference between how much in tax revenues that the government is actually bringing in. So the deficit that you're talking about here, when you get up to $400-billion deficit, you're actually looking at the difference between what the country is bringing in and what the country still needs to pay out, not just for debts to foreign countries, but to - but in terms of all government spending programs.

CHIDEYA: So it's kind of like overdraft protection. You get your $400-billion overdraft and that goes into the debt?

Mr. REED: Sort of like that, except that in this environment, again, we don't have very much protection against overdraft. There aren't too many more places that the federal government can raise money from you - that some of Democratic candidates have talked about repealing some of the Bush tax cuts - and you can - or extending new tax cuts to the middle class. I don't know that that necessarily makes anybody happy in this environment because there's equally almost legitimate arguments that could be made for keeping some of the tax cuts in place if you are in the, quote, unquote, "pro-growth camp" that believes that these things are necessary especially on the corporate side to keep the economy growing or if you believe that the middle class needs relief - where does the government get the money at some point to continue to pay for the spending. And I think that's the real problem, (unintelligible).

The deficit and the debt are really symptomatic of the larger problem of government spending, which for the last several years, has just been out of control largely due to we see in Iraq and Afghanistan. The wars are tremendously costly. And this isn't, by the way, a political judgment of any shortages (ph).

You know, are in a fiscal environment where it just caused a ton of money to keep those wars going, and the country just simply does not have the revenue sources that - the federal government doesn't to keep up with all of those cost and what it needs to do domestically.

CHIDEYA: So, given that you're saying basically the government just can't pay for everything that it is putting out, even though there are certain programs that look like they might be trunk a bit. What is the deal with all of these Federal Reserve cuts? There has been cut after cut after cut in this prime lending to banks. Is this really going to turn the economy around, you think, not for those big banks? I'm talking for people who are homeowners as we talk about so often - or people- even people who weren't homeowners but who were affected by how homeowners fair as well due to city and state taxes. Is this really going to trickle down?

Mr. REED: You know, I wrote about this on the blog the - just last week. There are definitely some people in this environment who would - there was a pretty good story in the New York Times a couple of weeks ago after the first rate cut. It talked about, ironically, the very people who were hurt the most in the - when rich were rising and home prices were very, very high - are now benefitting.

If you are a - probably a young person who's never owned a home right now and just got a little bit of money, saved up in a stable income, you will probably benefit from these rates coming down because they're lower than they have been in about the last three years. Home prices are lower than they have been probably at any point. In the better part of the last decade, you can go out and make some great deals. You can probably try to trim your rates on your credits cards.

I mean, anything that - any interest rate right now that's pegged to the federal funds rate, which is a key benchmark rate that many, many credit cards, many, many - some types of mortgages - but also many more types of short-term debts are pegged to, you can benefit a whole lot.

The problem is that if you're already in one of these homes, for example, that's - and you're underwater, meaning that you're house is worth less than the mortgage owner, and you've got poor credit or you don't have enough money or enough equity in the house to be able to refinance, then you're going to run it to a proper and you're not going to benefit.

Whether or not they - that helps the economy overall remains to be seen. I mean, the problem with economics statistics is that many times they lag by a couple of months. And so by the time you find out - by the time a recession is declared, you may have already been in one for about a month or two before you - before the rest of the country actually knows ,you know, some grand proclamation that comes from the Federal Reserve or some economists somewhere that we are in a recession.

CHIDEYA: We're going to talk a little bit more soon with a realtor in Ohio, your state, about the situation there. But last week, Countrywide Financial was subpoenaed by the attorney general of Florida. It's just one of a number of government agencies investigating the largest mortgage lender.

So, you know, is this going to be a situation where states line up basically to sue this lender, and what difference would that make in how this is unfolding?

Mr. REED: I think it's going to play out in a number of a ways. Countrywide is - obviously they were the largest non-bank mortgage lender in the country. They were - just sold a few weeks ago to Bank of America for what amount - to pennies on a dollar but many many. Countrywide is by far - was by far the largest player in the subprime crisis in terms of a single mortgage lender. But they weren't the only one. The thing is that Countrywide has become a symbol for how bad this gotten many communities.

And I think if you see a challenge like the one here in Ohio or the one here in Florida proceed with favorable results, you will probably see many other states - especially those where minorities or women or the working class, working poor were hit hard by subprime mortgages - are going to start lining up, and attorneys general are going to be filing suit against Countrywide and many other countries like - companies like Countrywide.

CHIDEYA: Well, Keith, thanks again.

Mr. REED: Thank you.

CHIDEYA: Keith Reed is a reporter for the Cincinnati Inquirer. He's finance blog for BET is called Dollar Out of 15 Cents. Transcript provided by NPR, Copyright National Public Radio.