One on One with Brian Wesbury, Chief Economist at First Trust Advisors
Friday, August 17, 2007
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SUSIE GHARIB: Joining us with more analysis, Brian Wesbury, chief economist at First Trust Advisors. Hi, Brian.
BRIAN WESBURY, CHIEF ECONOMIST, FIRST TRUST ADVISORS: Hi, Susie. Good to be with you.
GHARIB: Brian, do you think that the Fed action today is going to ease the credit crunch?
WESBURY: Yeah, I want to describe it as a helping hand, though, not a bailout. It seems to me that when I look at the markets, what we have is a lot of fear and fear is driven by a lot of leverage in the system, but underneath it all, there's very little problems in the market. Up through July, commercial paper had been growing at a 22 percent rate, commercial industrial loans are up an 11 percent rate. Even consumer credit is growing at a 5 to 6 percent rate. So there hasn't been a big credit crunch. What we're seeing is a lack of pricing for many mortgage bonds and a lot of hedge funds that are having serious problems because they leveraged themselves too much.
GHARIB: Do you think that there will be banks lining up to go to the discount window and get some cash?
WESBURY: Probably not. Even though the Fed said there is no stigma, there is and if you are seen going to the discount window, that's a sign you may be weak. In this kind of market especially with hedge funds out there, you're just opening yourself up for attacks. You know, what's interesting is that Countrywide went to the market yesterday, got $11 billion from a line of credit they had already established and the ratings agencies came out and said that that put them in pretty good stead for the next year or so. So it looks to me like there's plenty of credit available. All the Fed was doing was signaling that they're ready if things get worse.
GHARIB: Now some people were criticizing the Fed saying its action helped Wall Street, but not Main Street, in that it didn't address the underlying weakness in housing or the economy, people who are having trouble getting mortgages. What's your response to that?
WESBURY: I personally know many people who have gotten mortgages in just the past few weeks. The building in my community -- I live in the Chicago area -- continues. It's not as strong as it was. There's not as many houses selling as there was, but, clearly, the market has not frozen up. I keep hearing stories of this, but I just don't see it where I travel. And not only in my neighborhood, but also all over the country where I travel.
GHARIB: Well, that's not the sense that a lot of -- the feedback that we're getting from others and particularly the economists and there were surveys all over the place today, who were saying that they now expect the Fed to cut interest rates, to deal with business and the economy and the last couple of times you've been on our program, you have been saying that you think the Fed needs to raise interest rates and you're still standing by that forecast and tell us why.
WESBURY: Right. Well, let me just say this -- the Fed may cut interest rates. I think it would be a mistake to do that because then they would be forced to come back and raise them further, which would risk a recession down the road. In 1987, when the stock market crashed, everybody said we were going to have a recession. We didn't. The Fed cut rates and they were then forced to come back and raise interest rates too far and we ended up in a recession later. The same thing in 1998.
GHARIB: I know, but--
WESBURY: . to help long-term capital. I think today if they cut rates, they would actually be stoking inflation and causing problems down the road.
GHARIB: But, Brian, even the Fed in their statement today said the downside risk to growth has increased appreciably. So it sounds like even the Fed is posturing to cut rates.
WESBURY: What the Fed said was there's risks and they haven't cut rates yet and that's the thing. They could cut rates, Susie, there's no doubt about it. They could. I think that would be a mistake. Think about this. What is a rate cut going to do? It can't help anybody. You would have to drive interest rates all the way back down to 1 percent and then the sub-prime people could get a refinance at a very low interest rate which wouldn't last because the Fed would have to drive rates right back up again. We've had a situation where credit was too easy for too long and now we're paying the price and there's really nothing we can do except accept the losses and move through them and the Fed is trying to make that easier.
GHARIB: I wish we had more time to discuss this further. We'll have to get you back. Thanks a lot, Brian, for coming on the program.
WESBURY: Thanks, Susie.
GHARIB: My guest tonight, Brian Wesbury, chief economist at First Trust Advisors.
