In Addition To Interest Rates What Else Can The Fed Fix?
Monday, March 17, 2008SUSIE GHARIB: In Washington today, President Bush and Treasury Secretary Paulson tried to reassure investors around the world that the American financial system remains strong. Leading the effort to keep it in good health, the Federal Reserve. Fed policymakers meet tomorrow to decide whether to cut interest rates once again. But as Washington bureau chief Darren Gersh reports, that's not the only tool in the Fed's tool box to fix the financial crisis and the weakening economy.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Imaginative, unprecedented, aggressive. Those are some of the adjectives being used today to describe what the Federal Reserve is doing to prop up the U.S. financial system. Economist Mark Zandi says Fed Chairman Ben Bernanke had no choice but to step in and engineer a liquidation of Bear Stearns.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: It says the times we are in are very tumultuous. The financial system is in disarray and it's not just one part of the system. It's from top to bottom, from the municipal bond market all the way up to all the commercial banks.
GERSH: At the White House, President Bush met with economic advisers, praising the Fed, adding the United States is on top of the situation.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Our financial institutions are strong and that our capital markets are functioning efficiently.
GERSH: By taking on $30 billion in assets from Bear Stearns and offering loans to investment banks, the Fed has sparked complaints it is bailing out Wall Street. In this case, Mark Zandi says it's really a bailout for the nation.
ZANDI: It's a bail out of both of us. If the Federal Reserve did not step in, then the financial system would arguably unravel and that would be to everyone's detriment. It means a weaker economy, higher unemployment, so we would all suffer.
GERSH: Fed watchers expect more aggressive action to come. Vince Reinhart is a former top staffer at the Fed. He expects a deep interest rate cut after the Fed meets tomorrow.
VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: I think what they should do is try to draw a line under this episode by being aggressive. Market participants expect somewhere between three quarters and 1 percentage point of ease by the Federal Reserve. This is a good opportunity to not surprise them.
GERSH: Reinhart thinks the Fed could do even more, perhaps announcing it will buy up mortgage securities issued by Fannie Mae and Freddie Mac. That would support the housing market and free up capital tied up on balance sheets around the world. But Reinhart cautions all the Fed can provide is temporary cash, not the long-term capital Wall Street really needs.
REINHART: It's not a permanent fix. The permanent fix will have to be cash injections into these institutions and we've got to wait for that.
GERSH: As aggressive as the Fed has been, former Fed Governor Lyle Gramley says the central bank can't solve this crisis on its own.
LYLE GRAMLEY, SR. ECONOMIC ADVISOR, STANFORD GROUP: I think, probably, the Fed has done about all it can. It will lower interest rates further and that will help a little. I'm not sure it has any more innovative tools given what it has already done, which has gone a very long ways with innovation. And I do think that the next step probably has to come from the Federal government.
GERSH: By the time this is all over, economists say they wouldn't be surprised to see the Fed lower its key short-term interest rate to 1 percent or even lower if necessary. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
