Michelle Girard of RBS Greenwich Capital Management & Mike Holland of Holland & Company React To Fed's Move
Tuesday, September 16, 2008
|
|
|
|
SUSIE GHARIB: More analysis now on that Fed decision today to hold interest rates steady. Joining us, Michelle Girard, senior economist at RBS Greenwich Capital Management; and Mike Holland of Holland & Company. Hi, Mike. Hi, Michelle.
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Hi, Susie.
MICHAEL HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Hello, Susie. GHARIB: Michelle, let me begin with you. Did Ben Bernanke make the right call today?
GIRARD: You know, I think he did. They did not lower the Fed funds rate. But that doesn't mean the Fed isn't doing anything. What the Fed has been doing, actually, is adding liquidity more directly to the institutions that need it. So, they are in effect making money more easily available, but it's targeted to the companies that are struggling. So, you know, I think that's one of the reasons why the market reaction to no rate cut, which I think was a disappointment for some, was rather muted because right after the announcement was word that in fact the Fed had brokered a deal and loaned Lehman almost $138 billion to help unwind some of their positions.
GHARIB: Mike, what about the market reaction? Why did the markets rally? There was no rate cut. There's so much financial chaos and uncertainty. So why the turn-around on Wall Street?
HOLLAND: Well, as Michelle just said, I think the inside reaction on Wall Street, Susie, was that the Fed is doing the right thing by creating these credit facilities, as they have done since last March, to provide the problem borrowers with what they need. Going from 2 percent to 1.75 percent actually is fairly meaningless in terms of the major problems that are facing the financial markets rights now. So, the fact that they are providing the right -- and importantly, I think the -- the combination of Paulson and Bernanke have shown that they are not panicking. And a lot of people before the decision said they would just as soon see him not too anything because he is showing that he bought a little bit of insurance by getting rates down to 2 percent, and therefore he is in the right place and that was -- as Michelle just said, it was kind of soothing to some people in the marketplace.
GHARIB: Let's talk, Michelle, a little bit more about the bigger picture, because a lot of investors are getting pretty scared by this chain reaction of failures on Wall Street. What more does the Federal Reserve need to do to bring stability to the financial system?
GIRARD: Well, unfortunately, I think we're going to still see some volatility in the near term. The AIG situation needs to be worked out. I think there are a couple of other names of institutions that perhaps are also going to need to partner up with other institutions. But I do think, stepping back, that the economic impact of all of these Wall Street events is perhaps somewhat limited than people realize. You know, a lot of the problems that we're having are tied to very tight credit conditions. And those are not going to improve. But I don't think that they're going to get a lot worse because of what's happening. If the stock market reaction can stay relatively limited, and we don't see a huge further leg down, then I don't actually think everything that has happened in the last week or so has dire implications for the U.S. economy.
GHARIB: Well, exactly what you say about the tight credit conditions, that's why a lot of economists are saying it's time for a rate cut, but not just a rate cut, a big rate cut. Any chance, Michelle, of an inter-meeting emergency rate cut?
GIRARD: If, if the markets are fragile and sliding because of bad news, I think the Fed would take action, really to just shore up confidence. It's very much like Michael said, to lower the funds rate another 50 basis points is really just symbolic. It's sending a message that they're alert, but in the end, it doesn't really get -- it doesn't really do much to solve the ultimate problem. So if needed, they'll take action. I just don't think we're going to get to that point.
GHARIB: Mike, what about AIG? Do you think that the government should step in, and if it doesn't, and AIG fails, what does that mean for the financial system, and for the markets?
HOLLAND: I don't believe, Susie, that the federal authorities will permit an outcome that would disintegrate the financial system. So, that was actually some discussion of financial Armageddon over the last couple of days, I don't think that's going to happen. I think the combination of Paulson and Bernanke, as Michelle just said, they're not asleep at the switch. They're very much involved. I believe that their first choice is to have a private market transaction, maybe with some help from the government behind the scenes, but no bailout by the federal government. They said, according to some of the people who were involved from the government, there's no political appetite left for bailouts of people who have made mistakes.
GHARIB: All right. And, Mike, and just to wrap it up, what should investors do with everything that is going on? How should they respond about their investment portfolios? HOLLAND: Great question, Susie. The viewers should not panic. There has been a major decline already. To do anything right now that -- that speaks to the fear, whatever diversification goals people had in the past for their portfolios, they should stay with those. We, as Michelle said, have a very, very strong set of circumstances that are away from these financial problems, and I believe that the worldwide economy is going to weather this.
GHARIB: All right. We're going to have to leave it there. Mike, Michelle, thank you so much. We really appreciate you coming on the program.
GIRARD: Thank you.
HOLLAND: Thank you.
GHARIB: My guests tonight, Michelle Girard, senior economist at RBS Greenwich Capital Management; and Mike Holland of Holland & Company.
