hi, everybody. welcome to "wall street journal" report. it was one year ago today that the wall street was teetering on the brink of collapse, and merrill lynch about to be sold. we will talk to one of the few people who was able to foresee what was going to happen, and what he sees coming up. and also, lessons learned a and where we go from here. a nobel prize winning economist, and a woman who makes decisions for investing for millions and a pulitzer prize winning author.

"the "wall street journal" report" beginning right now. the "wall street journal" report begins right now. here's a look at what's making news as we head into a new week on wall street. more signs the economy is continuing to stabilize. the federal reserve beige book, a look at the economy throughout the nation, found that a vast majority of the nation is reporting economic activity stabilizing or improving, and it appears the worst recession since the 1930s is over. the report also says that soft consumer spend and a weak jobs market continues to suggest the economy roer will be subdued. the dow jones industrial average started off the holiday shortened week on an up note rising by 50 points and continued higher on wednesday and thursday defiling expectations for a september pullback. the markets fell, though, on friday. total u.s. consumer credit fell by a record $21 billion in the month of july for the sixth month in a row for a decline.

that's bad news in the short-term because consumer spending could help spark the economy, but it is good news over the long-term because it could increase the savings rate. steve jobs made an appearance at an apple media event this week. the first time he has been seen in public in about six months. the company's charismatic ceo underwent a liver transplant and returned to work in june. jobs got a standing ovation at the apple conference and he introduced several product updates. nouriel roubini was one of the very few people to foresee the economic downturn, the collapse in housing prices, and the problems in the financial system. now one year later what does he see on the horizon? nouriel is chairman of rge monitor.com, and he joins us right now from nyu. nouriel, good to have you on the program. >> pleasure being with you. >> let's talk about where we are in the economy. i've heard you talk about the possibility of a double-dip recession. i know that's not what you're forecasting necessarily 100%, but you see a possibility there. how would you characterize the economy right now? >> well, we're close to the end of this recession, so the

economy is bottoming out and will start to recover in the third or fourth quarter, but the key issue is not whether we'll have economic growth, but whether the recovery will be sustained towards potential growth rapidly or is going to be more dynamic for a while, and i see the main thing now is this u-shaped slow recovery rather than a v-shaped rapid recovery for potential growth because we still have the financial imballness will of the housing sector, of the financial schl, and of the corporate sector and now a releveraging of the public sector. i also see some probability, a small probability, by rising of a double dip because at some point down the line, we take away the stimulus too soon in which case we're going to be back in the recession, or if you keep on having large budget deficits and monetize them, eventually, it's going to go

higher, bond yields will go higher and we could crowd out the recovery of the economy. that is the risk. >> let me ask you about that risk because if we take away the stimulus -- now, obviously, the federal reserve has put all of the stimulus programs in place -- it's hard to unwind those programs. do you say there's a possibility the federal reserve raises interest rates at a time that unemployment is still in the double digits? >> no. i think that they're not going to make the mistake of -- they're not going to make on the fiscal side the mistake of cutting spending or raising taxes too soon, so that's one reason we -- the risk is exactly because the economic recovery is weak, they're going to maintain a very large budget deficit. they're not going to do the fiscal adjustments. the fed is going to be forced at that point to keep on printing money and increasing the money supply as way to keep a lid on interest rates, and eventually by the middle of next year, the bond market will look ahead and say there's a fiscal train wreck that is unsustainable fiscal deficit, and we keep on printing money. eventually that's going to lead to higher inflation. if that's going to be priced in by the market, then long-term interest rates could sharply rise for government bonds, and

mortgage rates will go higher, and then you can end up like in the 70s with stagflation, economic stagnation and inflation. that's the risk. >> i wonder where we are in terms of all this financial reform as well, because it has been one year since lehman brothers declared bankruptcy, and aig was rescued by the government, and merrill lynch was sold to bank of america. the financial system really was in peril, and, of course, you were one of the few to see that coming. what have we learned one year later, and are we still at risk for a similar event happening again? >> well, we have learned that we have to better supervise and regulate banks and other financial institutions. they need more liquidity, more capital, less leverage. too-big- to-fail institutions should be a system of winding them down. we should have high capital requirement for these banks that

are too big to fail, and we have to deal with the issue of compensation, of bankers, traders, investors, because a lot of the mistakes were done because of the incentive to take a lot of risk taking and leverage. there was maximizing short-term revenues, but leading them to bankruptcy of the institution over the near term. >> what do i need to know as an investor today? even as an employee today, what are the things that i need to be thinking about as i put my life into a practical sense here, after all that we've learned. in terms of investing. >> well, in terms of investing was to learn that actually there's still significant down side risk. since march bottom stock markets have gone up by more than 50%. when the economy is barely bottoming out. in my view the markets have been rising too much too soon relative to economic underlining fundamental, and for this reason, there is a slosh of liquidity now chasing assets. equities, commodities, oil, credit, and that's rising essentially these assets prices more than is justified by the economic recovery. i think there is still a risk by

q4 or q1 of next year of a contraction in asset prices of stock markets, a correction. >> a number of people have looked at china as sort of the savior for global growth. we are talking about growth in china back to 8% or so, if you lis on the somchai na watchers there. how important is china? you've made the point that, yeah, china is growing, but it's not going to be big enough to really take the world out of the slump. >> absolutely. it's growing for itself, but it cannot be the main locomotive or engine. total gdp is $3 trillion while the total gdp of the u.s. and japan is $40 trillion. $1 billion chinese -- while american consume $10 trillion. china can in some sense help itself and help parts of asia,

but it's not large enough to be the main engine of global economic growth, and i see a situation where growth in the u.s., in the euro zone the advanced economy will be there for the next couple of years. >> we appreciate your insights today. >> thank you. >> nouriel roubini joining us here in the studio. up next on the "wall street journal" report, it was the bankruptcy heard around the world. a look back at the stunning events of the failure of lehman brothers and the shock wave still being felt. police -- plus, if our economy is off life support, how is the health of the patient today?

the impact to me was really how bad or not how bad, but how do you contain this contagion? is there a way to build a buffer that it stops? with lehman and clearly it didn't. a year ago this weekend, lehman filed for bankruptcy leading to a massive

intervention in businesses and a stunning slide in the financial markets, and where are we now and are there lessons to be learned? joining us now to talk about that is joseph stiglitz, nobel prize winning economist and chair of the white house council of economic advisors. liz ann sonders, charles schwab chief investment strategist. and the js journal economics editor david wessel, author of "in fed we trust, ben bernanke's war on the big panic." great it see you all. >> nice to be there. >> good to talk with you. let's talk about this historic, really, moment in time that we were september 2008. professor steglitz, what have we learned in the past year? how would you characterize the environment today? >> i don't think we learned the right lessons. that's one of the important things. one of the lessons that too many people took away from lehman brothers is that we have to save financial institutions in trouble with a blank check, and what we should have done is that when financial institutions get

into trouble, when they are too big to fail, too big -- so big, we have to have a mechanism of orderly resolution, and that doesn't mean a blank check of protecting bond holders and shareholders, the kind of bail-out that we've done for citibank and so many, which is a real problem going forward, because the concern about the size of the deficit. the second thing we haven't learned, i think, is that one of the reasons that this was such a calamity is that we had allowed these institutions to get so big, to get so intertwined. our regulatory system had failed. the fed hadn't done its job. here we are a year later. we still haven't passed legislation to deal with the too big to fail banks. >> uh-huh. >> the way we addressed the crisis, we've let a -- results

in the concentration of the banking system, so our problem of too big to fail has gotten even worse. >> well, it's funny you say that because it's true that we are looking at the larger banks get government's money, and they are still, i guess, too big and some would argue too big to fail, and, yet, liz ann, we have a market that has been trading higher, as if we're out of the woods. >> there are a lot of people who have been floored by what the market has done this year in light of the still weak fundamentals when, in fact, the market in many ways is doing what it's supposed to do. you know, the market bottomed in march, which is the same month the leadling indicators bottomed. we don't know whether at down 57% from peak to trough it effectively discounted the negativity. i think it probably did, or at least the market is telling us it did. we don't know whether the rebound has gone beyond the fundamentals. there's just still a lot of people who are big disbelievers. i understand the disbelief in

terms of the turn we see in the economy, but it's hard to quibble with what the market has done. i think the market is telling us something about the economy and the nature of risk taking and the willingness to go back out the specter and take some risk in the interest of return. >> and looking back, david, you've talked to all of the players involved and the decisions that led to lehman brothers going bankrupt and not having government intervention. former treasure secretary paulson, fed chief ben bernanke, and tim geithner. professor stiglitz says we still have too big to fail. did they make the right call? >> i think joe stigli tz has got it right. it's shocking that a year after this near economic cal amity that congress has not figured out a way to give the new treasury secretary and the fed the tools so they have a better choice should they be confronted with another lehman today. their view is they had only one choice. they could let them something into bankruptcy or bail them out.

there was no way to do the resolution that joe stiglitz suggests. they asked for that authority and don't get it. so one thing it tells sus that both in the market and in congress, there is a kind of giant sigh of relief that the worst of the nightmare is over, and we are starting to see it return to the kind of behavior maybe a little complacency which is quite alarming given the many problems that lurk out there. >> why do we think the nightmare is over, because the markets have been trading better, and there's something about a rising stock market that makes people feel good. with health care being sort of front and center right now with the administration, is financial reform taking a back seat? are we losing the momentum? >> i think there's a chance of that. it looks to me like barney frank in the house is quite committed to pushing a bill through the congress. it's not so clear that the senate can get its act together. it seems to be the same storyline for almost every topic you talk about. one thing i think will be quite interesting is president obama is going to wall street on

monday, and i would be surprised if he stands before a banner that says mission accomplished. he wants to take credit, though, for things being a little better, and i suspect that if he is listening to tim geithner, he will do a little lecturing of congress and in addition to fixing the health care system, don't forget the financial fire prevention proposal either. more with our panel about the state of the recovery and more of the major players on wall street. stay with us.

>> simply, our health care problem is our deficit problem. nothing else even comes close. nothing else. president obama laying out his agenda on health care reform to a joint session of congress this week. we're back with more discussion on the lessons and the outlook from one year of financial crisis with columbia university's joseph stiglitz, nobel laureate in economics, liz ann sonders and david wessel. the president clearly stated that health care reform is key to economic reform. do you agree? >> yes. i mean, obviously over the long run, he is absolutely right. a major source of our deficit, but there are other things as well. >> 29% of americans are covered by government insurance, according to the most recent census department figures. the uninsured rate is at 15.4%. can this $900 billion proposal change the situation?

>> yes. it is the beginning of the process to change the structure of our health care system to try to bring down costs. for instance, one part of it is to put a tax on -- or one way of putting it, withdrawing the tax exemption that we have for the luxury health care plans, eincrease the demand in one part of the system, and drive up overall health care costs, helping that, and using that to finance the uninsured who we all pay for, because when they go to the hospital, it adds to our bill, because we are not a society who will turn somebody away from the hospital. the result of that is that we are all paying for it, but we are doing it in a very inefficient way. >> one of the issues, i think, going into 2010, and liz ann, let me get you to weigh in on this, is that managers don't necessarily want to add to their work force right now. they're not going to increase their hiring levels because they're afraid of this

uncertainty, they're afraid of the possibility of higher taxes, cap and trade. they don't know what 2010 is going to look like, and they're not going to add until we have unemployment remaining to be an issue. is this altering your investment strategy at all? how has this changed you? >> no. i don't think there's something terribly unique about this environment in terms of what the job situation is likely to look like compared to 2001, compared to 1991, both of which were jobless recoveries, and in this world of greater efficiency and productivity, there is this desire for businesses and ability for businesses to ring as much out as they can without going back to the employment well. that is going to be a characteristic of this recovery. that is some of the leading indicators for jobs, but the decline in the unemployment claims are now moving in the right direction. we now look at the leading versus the lagging measures of employment to get a sense of that trend. >> the good news out of this, i guess, david, is the savings rate is rising. on a personal level, people are a little more conservative.

was this shock enough to change the personal finance views of the average american? >> well, we'll have to see. it's kind of unfortunate good news, because it hurts consumer spending. >> right. >> in the short term, be new the long term, americans didn't save enough. my opinion is that americans are quite shaken up by this period. the most of us believe that the one thing that would never go down is the value of our house, and a lot of us had come to expect our 401 ks, our retirement plans would -- they might go up and down, but they were pretty safe, and same with our kids' college savings accounts. they took a big hit on this thing, and so people are naturally going to be a little more cautious, and this may -- we may look back on this and see it was a huge change in consumer behavior. one sign i see is that the consumer products companies, procter & gamble, they are clearly planning for that kind of a world. >> so liz ann, you have made the point before that you don't know that you are in a bubble when

you are in a bubble. are there other bubbles right now that we should be aware of. how do i want to invest over the long-term? i know you're a long-term thinker. >> i think probably the most commonly talked about potential bubble is in treasuries, gin the mad rush to that safety that treasuries offered, and given that for a short period last year we went into negative territory in terms of the yield on treasury bills where investors were willing effectively to pay money to have their assets in the safety of treasury. there aren't any imminent reasons to think that we're going to see a huge back-up in yields which, of course, would bring prices down and start, i think, to bring more people out saying, you know what, we may have had a little bit of a bubble, but it's certainly the asset class lately that has attracted the most attention by far, and i think it's because of this truly unprecedented risk aversion that kicked in last fall and the realization and i think that the frugality that david talked about is a good thing.

it's not that 70% of the gdp is driven by consumption for the economy in the short-term, but in terms of financial fitness of the household sector, the private sector, i think it's actually a very healthy path that we're on, even if it's longer lasting than some that would see the economic growth in terms of that. >> clean up your own balance sheet. yeah. we'll leave it there. great to have you all on the program. thank you so much. joseph stiglitz, david wessel, liz ann sonders. check out our website wsjr.cnbc.com. you'll also find a link to my new blog, investor agenda.cnbc.com. now a look at the stories coming up in the week ahead that may move the markets and impact your money this upcoming week.

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check out our website wsjr.cnbc.com. you'll also find a link to my new blog, investor agenda.cnbc.com. now a look at the stories coming up in the week ahead that may move the markets and impact your money this upcoming week. monday president obama is set to deliver what the white house is calling a major speech on the financial crisis. he will be at federal hall in new york city. on tuesday the producer price index is released. that measures the cost of consumer goods at the wholesale level, and the total retail sales report for the month of august also reported. also, the united nations opens the 64th general assembly

in new york on tuesday. wednesday the latest consumer price index will be reported. that tracks the cost of consumer goods and is a key indicator of inflation. on thursday a look at the housing markets. the commerce department will report the number of new residential units that began construction in august. always important to check out the health of housing. and that's it for us for today. thank you for being with us. next week we go back to school. my special guest new york school chancellor joel cline. each week keep it right here where wall street meets main street. have a great week, everybody. i'll see you again next weekend. i've been growing algae for 35 years. most people try to get rid of algae, and we're trying to grow it. the algae are very beautiful. they come in blue or red, golden, green. algae could be converted into biofuels...