One on One with Robert McTeer, Former President Dallas Federal Reserve Bank
Wednesday, October 08, 2008
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SUSIE GHARIB: More analysis now on that global interest rate cut from a former high-ranking Federal Reserve official. Joining us, Robert McTeer, former president of the Dallas Federal Reserve Bank, and currently distinguished fellow at the National Center for Policy Analysis, that's the Dallas-based think tank. Mr. McTeer, welcome back to NIGHTLY BUSINESS REPORT.
ROBERT MCTEER, FORMER PRESIDENT, DALLAS FEDERAL RESERVE BANK: Thank you, Susie.
GHARIB: I know you endorsed this coordinated rate cut. Tell us why you think it was the right move.
MCTEER: Well, for a while now, I've been saying that we don't need to cut rates further, that we've gone as far as we need to. But interestingly, yesterday I wrote in my blog that if we could use a rate cut here to lure other central banks into doing the same, it would be worth it. In particular, I think the European Central Bank has -- they actually tightened rates not long ago. And they needed the political cover, I think, that we gave them. So, it should have given a lot more bang for the buck to have a coordinated cut. So it was a good idea. And I don't know why the markets didn't applaud it.
GHARIB: Do you think that the Fed will have to cut rates again when policy makers meet on October 28th?
MCTEER: Well, I think the market is going to be demanding it and there probably wouldn't be much to lose by doing it. And not doing it might just aggravate the market turmoil. So.
GHARIB: How much of a rate cut?
MCTEER: So while I don't think there's a real need -- they probably would go a quarter so that they could have two more and get to 1. You can't take very large bites if you only have one-and-a-half left.
GHARIB: That's right. All right. So we got this big rate cut move today internationally. The big question though is, will this spur banks and other financial institutions to start lending money again? What do you think?
MCTEER: Well, I don't think their fear has much to do with the rates, unfortunately. I think there are going to have to be other solutions to that. And I wish the program of Mr. Paulson could get under way a little bit earlier than apparently it's going to. Frankly, I think there is some low-hanging fruit left. And that would be a suspension of mark-to-market accounting. I think that's long overdue and Mr. Cox ought to direct the accountants to do that forthwith. Then it wouldn't be so urgent.
GHARIB: Don't leave that yet, because there has been a big debate about mark-to-market accounting and there are a lot of people in Washington and on Wall Street who have different views on whether it's a good idea or not or is it more phony business, playing with numbers? Why are you in favor of it, of suspending the rule?
MCTEER: Because a lot of banks are holding mortgage-backed securities that because they're not trading right now, because they're illiquid, they're having to write them down to fire sale prices. And when they have to write them down, it reduces that much from their capital. Most of these banks would be in a position to hold these securities, either to maturity or until they rose substantially in value. So to me it's sort of an artificial loss. And you have to be a real accounting purist to put your banking system through that wrenching adjustment unnecessarily.
GHARIB: OK. All right. Let me ask you, we just have a few minutes left, and I want to ask you an important question. We saw the Fed take some unprecedented moves recently besides what happened today, also intervening to directly lend money to American businesses through the corporate -- commercial paper market. Do you think that the Fed's next step is going to be to intervene and directly help out distressed homeowners through some kind of mortgage renegotiations?
MCTEER: Well, I think it would be logistically cumbersome to do that. Perhaps there's some way it could do it on a wholesale level by making more funds available to Freddie and Fannie and the housing administration and so forth. I doubt that it would do it piecemeal or at the micro level.
GHARIB: In just a word, do you think that this crisis is of such a magnitude that the Federal Reserve system cannot handle it?
MCTEER: I think eventually it will handle it. I'm amazed that the flexibility and the innovations that they have undertaken. You know, people started out saying they're operating by the seat of their pants, they're making it up as they go along. That's true, thankfully, because I think they've done a magnificent job of moving onto other ways of doing things when the old ways weren't working very well.
GHARIB: All right. Some very fresh ideas. Thank you very much, Mr. McTeer, for coming on the program.
MCTEER: My pleasure.
GHARIB: My guest tonight, Robert McTeer, former president of the Dallas Federal Reserve Bank.
