One on One with Alice Rivlin, Senior Fellow at the Brookings Institution
Monday, August 13, 2007
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SUSIE GHARIB: It looks like the nation's banks are clamping down on how they make mortgage loans. A new Federal Reserve survey shows a growing number of banks are tightening lending standards on sub-prime mortgages. And even on prime mortgages, it looks like things are getting tougher. In its latest quarterly survey of bank loan officers, the Fed found 56.3 percent of banks responding said they had tightened their loan parameters for borrowers with weak credit histories. Just over 40 percent of banks responding had ramped up standards for non-traditional mortgages like the so-called "alt-a" loans and about 14 percent of banks said that even for borrowers with good credit records, mortgage standards were getting more restrictive. Joining us now with more analysis of that Fed survey, Alice Rivlin, senior fellow at the Brookings Institution and former vice chair of the Federal Reserve. Hi, Alice. Nice to have you on the program.
ALICE RIVLIN, ECONOMIST, THE BROOKINGS INSTITUTION: Hi, Susie.
GHARIB: Well, let me begin by asking you how do you think the Federal Reserve is going to factor in this information of the survey along with all of the other parameters that it looks at when it's assessing the economy. How important is this survey?
RIVLIN: Well, the Fed gets an awful lot of information and the banking survey is one of the things they do that tells them something about what banks are doing. This survey seemed to me to have no surprises. If you were a bank, wouldn't you be tightening up on sub-prime loans at the moment? And to find that banks are actually doing that is not a surprise to me and probably not to anybody else.
GHARIB: Do you think that the Federal Reserve policy makers are pleased that banks are tightening up on -- you know, on giving out loans considering that they had been somewhat critical of banks that had been too loose when it came to lending?
RIVLIN: Well, maybe, but it's a balancing act. Sub-prime lending has increased over the last few years enormously. It has helped a lot of people buy houses who wouldn't have been able to otherwise, a lot of them lower income and minorities. So, there's a lot of plus there. It just got a little out of control. So, I suspect the Fed is thinking, well, maybe this is a little bit more neutral.
GHARIB: As you know, you have been here -- we have all been hearing people from Wall Street and from the business world saying the Federal Reserve needs to cut interest rates now. Given the sub-prime mortgage mess, given the market sell off and also this credit crunch, do you think the Fed should cut interest rates now?
RIVLIN: No, I don't. I think they did exactly the right thing when they held on to their Fed fund's rate last week. They have put a lot of liquidity into the market and that's good. There are central banks around the world are all doing the same thing. It looks today, anyway, as though it were working, as though the markets were stabilizing. And that's good. I don't think they're going to have to cut interest rates. If they don't have to, that I think is all for the good.
GHARIB: But don't you -- what don't you see that's going on in the marketplace that would force the Fed to cut interest rates? Why inject liquidity into the system rather than cutting interest rates?
RIVLIN: Well, they're injecting liquidity into the system by defending the interest rate they have already got, which seemed to me about appropriate. The case for lowering interest rates would be if they saw the real economy slumping and jobs falling off, unemployment going up, or something like that. We haven't seen any of that. The economy seems to be in reasonably good shape. If they can stabilize the credit markets with this liquidity move, then an inappropriate cut in interest rates can be avoided.
GHARIB: As a former Fed governor, you have sat through many crises before. What else should the Fed be doing?
RIVLIN: I think they're doing what they can do. And they may have in mind what happened in the fall of 1998, when in a somewhat similar, but rather different situation, we did cut interest rates and afterward took quite a lot of criticism for fueling the stock market boom and the dot com craze. I think that may be what they're trying to avoid. If they can stabilize without cutting the rates at this moment, they won't.
GHARIB: A lot of people say that the situation that's developing now could be a repeat of the financial crisis of 1998. Do you see it going down that pathway?
RIVLIN: Well, what I see is recovery, so far, so good. We don't know how long it will last. And remember that the crisis in 1998, the Fed did work through it. It did not become a general rout in the markets. What we were afraid of at the time was that the international crisis would ricochet around the world again and countries like Brazil would be in trouble, but that didn't happen.
GHARIB: So, what do you think of the way that Fed Chairman Ben Bernanke is handling the situation so far?
RIVLIIN: I think he's doing great. He is doing what a central bank ought to do and he's doing it methodically and he is explaining what he is doing. And so far, it seems to be working. Now, that doesn't mean that it -- that they won't have to do more. They may.
GHARIB: All right. We'll leave it there. Thank you so much, Alice, for coming on the program.
RIVLIN: Thank you, Susie.
GHARIB: My guest tonight, Alice Rivlin, senior fellow at the Brookings Institution and former vice chair of the Federal Reserve.
