PRESIDENT GEORGE BUSH:
The market is not functioning properly. There has been a widespread loss of confidence and major sectors of America’s financial system are at risk of shutting down.
BROOKE GLADSTONE:
The Bush Administration’s bailout plan calls for Congress to hand over 700 billion dollars to be spent as Treasury Secretary Henry Paulson sees fit – no strings, no oversight, no peeking, not even by the courts. It’s like if you looked up “carte blanche” in the dictionary you'd see a little picture of Paulson.

In an open letter to colleagues on Tuesday, former New York Times financial reporter David Cay Johnston urged fellow journalists to be, above all, skeptical. Quote, “As of now, we are as a group behaving just as we did the last two times the administration sought to rush through a hastily-thought-out, ill-conceived plan. Why in the world are we being so gullible and naive? What happened to the core value of journalism? Check it out.”

David, welcome to the show.
DAVID CAY JOHNSTON:
Well, thank you for having me, Brooke.
BROOKE GLADSTONE:
So that was quite a cri de coeur, which apparently was prompted by this bit of seemingly innocuous boilerplate voiced by NBC’s Tom Brokaw on Meet the Press last Sunday.
[MUSIC UP AND UNDER]
TOM BROKAW:
Can a government rescue plan save our economy, and at what cost to U.S. taxpayers?
DAVID CAY JOHNSTON:
Brokaw and many other journalists on TV, and some in print and on the radio, assume because we were told there’s a crisis, there's a crisis. Now, the fact that we've had a couple of big firms on Wall Street fail, that’s capitalism.

If you look around, you'll notice that banks are still making ordinary loans to ordinary businesses. Your mailbox is still full of proposals to sell you credit cards and extend you debt. The Internet still has ads for these very toxic mortgages that are at the heart of this. They're being advertised all over the Internet.

You know, I don't have any doubt that whatever people in the market have said to Secretary Paulson has scared him. But remember that Secretary Paulson used to be the head of Goldman Sachs, the biggest investment bank in the country, and Goldman Sachs has announced that it’s converting itself into an investment bank, which will allow it, by the way, to get in on this 700 billion dollars.

That alone ought to have people asking questions. Well, wait a minute, what’s the pricing of this deal and who’s going to make money off it?
BROOKE GLADSTONE:
But you've also seen the markets going, you know, down 500, up 300. I mean, if that’s not an indication of crisis, what is?
DAVID CAY JOHNSTON:
Well, we've had many other occasions in the past where the markets have behaved like this.
BROOKE GLADSTONE:
Like this?
DAVID CAY JOHNSTON:
Yes, where markets have wild swings from day to day because of something going on around us. Likewise, much has been made of a technical issue called the TED spread. It’s the difference between the interest rate on short-term Euros and short-term Treasuries.

And the TED spread is quite large right now, but if you look back many years, it’s been this large on other occasions. So it’s an indicator there may be a big problem, but it’s not definitive proof of that.

And my point is not to argue that there is or is not a crisis, but that journalists need to begin not by questioning around the edges but by going to the core question. Is this the least expensive way to do this? Are there market solutions that might be applied?

Here’s a simple one. No one I've seen has asked the Treasury, did you ask every bank to submit to you data on how many illiquid assets you have, what you bought them at and what you value them at now? That might identify the problem is concentrated in a handful of banks.

Let's have disclosure. Would that perhaps cause a couple of banks to suddenly go out of business? Yeah, might well do that. But if it’s a cheaper solution, maybe that’s a better idea.
BROOKE GLADSTONE:
But David, it’s urgent. There’s no time for that kind of folderol.
DAVID CAY JOHNSTON:
That’s politics. That’s not economics. Congress had set September 26th as the date when they would go into recess so the members could go home and campaign. If this is such a gigantic crisis that we have to put out 700 billion dollars, which we may never get back, then perhaps Congress needs to stay in session.

And, by the way, if members of Congress do have to go home because they've got tough races, we have this modern thing called a jet airplane. They can run home for a day, make a vote and go back to the campaign trail.
BROOKE GLADSTONE:
Those are cool. I've seen those. So when you lowered the boom on Romenesko, a website that all of us regularly read so you knew it would get around, you were hoping that maybe you could have some direct impact on the coverage across the rest of the week. Did you find that those questions were being asked?
DAVID CAY JOHNSTON:
I did. You know, I'm known as a bit of a crank for posting these sort of let's-stick-to-the-basics questions in journalism at the Romenesko site.

And last night, in my hotel down here in Texas, I was watching – I frankly don't remember which of the cable channels – but somebody asked the question, well, are there alternatives? Now, the answer they got wasn't a very good answer, but they at least asked the question, are there alternatives?

I'll tell you one thing that disheartened me, and that was the number of reports that immediately jumped on the FBI is investigating criminal wrongdoing. This is fundamentally not a story of criminal wrongdoing. This is a story of the structure of government and the rules that define our society.

Yes, there are crooks. There are always crooks. It’s the policy that’s the big story, not the crooks. That’s the cheap story. It’s an important story, but it’s the cheap story. The big one is how the government acted.
BROOKE GLADSTONE:
In the search for wrongdoers, prominent among them in the media are the short sellers. These seem to be the principal villains maligned in press accounts. Can you explain who they are and whether they've gotten a bad rap?
DAVID CAY JOHNSTON:
When you buy a stock, you’re doing what’s called going long, and you’re betting the stock price will rise. Well, there are people who instead sell stock they don't own. They borrow it and they sell it, hoping to buy back at a cheaper price and profit from the price falling.

I mean, there are plenty of offenses committed by short sellers, as there are by people on the other side, the longs. But it’s easy to demonize the short sellers because most people don't think in terms of what they do. Short sellers provide a valuable service by deflating artificially high stock prices.

Now, the Treasury Department, which in this administration has said free markets are virtually a god, free markets are not to be interfered with, has now interfered in the market. It has put its thumb on the scale by prohibiting trading in about 900 companies by the shorts.

It is biasing the market upwards. That’s not free market capitalism. That is state-directed markets and corporate socialism. That’s something we ought to be asking tough questions about.
BROOKE GLADSTONE:
David, thank you very much.
DAVID CAY JOHNSTON:
Thank you, Brooke.
BROOKE GLADSTONE:
David Cay Johnston is a former investigative reporter for The New York Times and author, most recently, of Free Lunch.