One on One with Robert McTeer, Fellow, National Center for Policy Analysis
Tuesday, January 22, 2008
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SUSIE GHARIB: More analysis now on that big rate cut by the Fed today. We're happy to have with us Robert McTeer, the former president of the Federal Reserve Bank of Dallas, who for years participated in those Fed policy meetings and deciding interest rate policy. He is now the distinguished fellow at the National Center for Policy Analysis. Mr. McTeer, nice to see you again.
ROBERT MCTEER, FELLOW, NATIONAL CENTER FOR POLICY ANALYSIS: Nice to see you, Susie.
GHARIB: Well, did the Fed do the right thing with this big rate cut today?
McTEER: Yes, they did. By coincidence I had an op ed this last Sunday arguing for boldness. And I argued that they ought to cut 50 basis points and they ought to do it now rather than at the meeting. And I said Ben, get out your speed dial. And they went me one better. They did 75, which is even wetter.
GHARIB: But why --
McTEER: They did the right thing.
GHARIB: But why the rush, what fundamentally changed? Why couldn't this wait until next week's meeting?
McTEER: My guess is that the stock market reaction and all over the world following our terrible stock market in the last several days, on Martin Luther King's day all over the world the markets plummeted. And when we turned on the TV this morning futures, Dow futures were down over 500. So I think they decided they needed to do something bold and dramatic in order to get the market's attention.
GHARIB: They got everybody's attention but the question is will these rate cuts rev up the economy? What do you think?
McTEER: Well, I think at the very least they will cushion the blow of either a recession or a slowdown that feels like a recession. It will do some marginal good, but the basic problem is the sub-prime thing and financial institutions worrying about getting paid back when they make loans and worrying about the condition of their counterparties when they engage in transactions. And if you are afraid you may not get your money back, it doesn't really matter what the rate is. So the lower rates will be helpful, but they don't really get to the heart of the problem.
GHARIB: All right so if the Fed is reducing rates and lenders are still having tight lending standards, what is the solution here to turn the economy around?
McTEER: I am afraid the solution is just a little more time. That doesn't sound very good, I know. We have had some healing already. We had the LIBOR rate in Europe well above the Fed funds rate, indicating distortion in the world economy. That suggested, and I think there are some adjustments going on, but frankly, house prices are going to have to fall some more. Housing starts are going to have to stay low for quite a while until this all get its equilibrated. The thing is though Susie, we have a very resilient economy. If you will recall, 9/11 tipped us into a recession before they revised the numbers. And we started growing coming out of that recession the very next quarter, much sooner than everybody had accepted.
GHARIB: Let me ask you something. Let me ask you something about that Mr. McTeer, because is this a typical recession or economic downturn, whatever you want to call it, or something more serious going on? Because some experts are suggesting that the international financial system is deteriorating. What started out as a sub-prime mortgage problem in the United States is now a full-fledged global credit crunch. What do you think?
McTEER: Well, I think it has been a -- it has turned into a full- fledged global credit crunch. But that's because the sub-prime securities are all over the world. People don't quite know where they are. They don't quite know how bad they are. And so even though it is broadened, it still has the same nucleus as the problem.
GHARIB: Do you think that the White House's call for a fiscal stimulus will do much to get consumers and businesses spending again? Some of the people I have talked to said $150 billion stimulus isn't enough.
McTEER: Well, not only is it not enough, but giving people money sort of after the fact does absolutely nothing for incentives. So I'm not a big fan of a stimulus package that has no incentives in it. I think it -- borrowing from some people in order to give money to other people and it's going to be a little late anyway when they get it -- will just needlessly raise the deficit and start us off at a worse point when we do start recovering and healing.
GHARIB: So you sat in on so many policy meetings at the central bank. What do you think the Fed is going to do next week at its policy meeting? Will they cut rates again given that the Fed said in a statement today about downside risks continuing, a lot of people are counting on another big rate cut.
McTEER: Well, I don't really see why you would count on a big rate cut, only a week after one of the biggest we've had if years. I think a quarter point may happen. And I'm sure that if it does, it's done reluctantly. The Fed wants to get in a position that it is not being dictated to by the markets. But unfortunately, it's increasingly being dictated to by the markets. It got to the party a little bit late. Like all the rest of us, it underestimated the extent of the problem. But it's catching up very rapidly. I think people ought to ease up on them just a little bit and give them a little slack. Because this is unique as you have indicated.
GHARIB: Last question to you, sir. A lot of people are questioning the leadership of Fed Chairman Ben Bernanke that he has missed a lot of the warning signals about the economy. He has talked about taking aggressive action but he has been slow to respond. Do you think Mr. Bernanke can navigate us through this crisis?
McTEER: Well, can do so as well as anybody can. I think we should ease up on the chairman. I'm reluctant to criticize anyone for not seeing things that I didn't see either and most other people didn't see either. Securitization was one of the wonders of the world. It was only good before it turned bad and Mr. Bernanke inherited that mess and he will get us out of it.
GHARIB: Well, thank you so much for coming on the program. We hope to have you back.
McTEER: Thank you.
GHARIB: My guest tonight Robert McTeer, the former president of the Federal Reserve Bank of Dallas and now distinguished fellow at the National Center for Policy Analysis.
