One on One with Chris Varvares, President of the National Association for Business Economics
Tuesday, October 07, 2008
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SUSIE GHARIB: Speculation about interest rate cuts in the U.S. and around the world. Joining us for more analysis, Chris Varvares, chief economist of Macroeconomic Advisers and president of the National Association for Business Economics. Nice to see you, Chris.
CHRIS VARVARES, PRESIDENT, NATIONAL ASSOCIATION OF BUSINESS ECONOMICS : Nice to be here.
GHARIB: Chris, do you think -- where you are in this rate debate? Do you think the Fed is going to cut interest rates as well as central banks around the world?
VARVARES: There's a broad consensus as reflected in the Federal funds futures market to the Federal Reserve will be cutting rates at least 50 basis points in the very near future. As the previous -- Darren's package suggested, that it's coming, the chairman in his speech today pretty well signaled as much as the chairman of the Federal Reserve will, that it's on its way.
GHARIB: But will that help the global financial system? It seems like no matter what the Fed does, it doesn't get the money flowing again.
VARVARES: Well, there are a couple of things. Certainly, it's the case that lower interest rates will help. Lower interest rates tend to boost asset prices, that helps balance sheets, it helps -- it can help the stock market, in most instances, it does. So, that's the first step. It will help. And eventually, I think we're likely to go to something like 100 basis points, but we could go all the way to zero. It's not impossible. The other part of it is to get banks lending again. And if they don't, the Fed has signaled that it's prepared to stand in and for major credit worthy organizations, it is going to be the lender of last resort. Through the TARP program that the Treasury has instituted and the Fed's other policies of providing liquidity, the hope is that we can get banks once again not so much to lend to each other, that's part of the problem, but really to lend to business and to consumers. As you know, credit is the lifeblood of the economy, without it, it's very difficult to see growth. So the Fed is working very hard to solve that problem.
GHARIB: Right. But let me ask you this way, you said to get banks and lenders lending again. Does it make a difference that they're willing to lend if people are losing their jobs and not in a position to be borrowing? I mean, your own survey from your group, the NABE, is expecting the unemployment rate to get to 7 or 8 percent next year.
VARVARES: Well, the unemployment rate in the NABE survey was -- even before the intensification of the financial crisis, to get to 6.5 percent. And given the intensification of the financial crisis in the last couple of weeks, we found in the survey that the panel expected the economy to be much weaker at the end of this year and early next year. We didn't ask them specifically about the unemployment rate but one could extrapolate that it would be pushing up towards 7 percent, maybe higher. What people.
GHARIB: I know, but what my point is -- my point is, yes, if people don't have jobs, why would they be -- go borrowing money to buy a car or a house or whatever?
VARVARES: Obviously, people who are losing their jobs would be likely to not go out and take out loans, but other people who are more secure in their employment are going to take out loans to do what they do. And that's going to allow them to keep spending, to increase their spending. And it's critical for businesses, small- and medium-sized businesses, to be able to obtain bank financing for all manner of spending, whether it's expanding an advertising program or whether it's new Web site development, or whether it's new plant and equipment. So, we have got to get the credit flowing again and what I would say, rather than "drill, baby, drill," we need "loan, baby, loan," to get credit flowing again.
GHARIB: Well, I hope you're right about that. How -- where are we in the trajectory of this crisis?
VARVARES: Very hard to tell. Confidence is a fickle thing. It has been very fragile. It has eroded very quickly. If the Fed steps and as Treasury program comes on-line over the next several weeks and as the details become known, if it's effective in restoring confidence, we could see a rapid turn-around. There's no guarantee of that. We may need additional steps, we may need additional stimulus.
GHARIB: Right.
VARVARES: It really hinges critically on what happens to confidence.
GHARIB: A lot of unanswered questions. Thanks, Chris, for coming on tonight.
VARVARES: You bet.
GHARIB: My guest tonight, Chris Varvares, chief economist of Macroeconomic Advisers.
