Transcripts

The Federal Reserve Teams Up With Europe's Central Bankers

PAUL KANGAS: The Federal Reserve today joined forces with central bankers in Europe in another assault on the credit crunch. The Fed nearly doubled the number of dollars it makes available to banks in Europe, a move designed to ease stress in a key credit market. As Darren Gersh reports, the Fed also upped the cash it's making available to U.S. banks by $50 billion. DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: With another massive injection of cash for banks to lend to each other, analysts say the Federal Reserve is buying more time. Time, Global Insight's Brian Bethune says, that banks can use to repair their balance sheets.

BRIAN BETHUNE, CHIEF U.S. FINANCIAL ECONOMIST, GLOBAL INSIGHT: We're muddling through this sub-prime write-off problem. In some sense you can say it's not elegant, it doesn't look particularly clean, but we are muddling through and getting the job done.

GERSH: By adding another $24 billion in funds available to European banks, the Fed is targeting a specific problem in lending between big banks. Interest rates on the LIBOR, short for London inter-bank offered rate, remain stubbornly high. Economist Josh Bivens says that is bad sign, because LIBOR sets the interest rate banks charge each other.

JOSH BIVENS, ECONOMIST, ECONOMIC POLICY INSTITUTE: It's essentially a measure of how much Citibank trusts Wells Fargo trusts Sun Trust. So as it starts to spread away from other very safe interest rates, it's a very good indicator that people are getting worried about the credit worthiness of banks.

GERSH: And with some reason. Global Insight estimates sub-prime and other write-offs are running around $200 billion with another $100 to $200 billion more to come in the next six to 12 months.

BETHUNE: It certainly looks like from our perspective that more write- downs are going to have to be taken and that uncertainty about who, what, when and where these write downs will take place creates this pressure in the markets and that hasn't gone away.

GERSH: By offering more cash directly to banks, analysts say the Fed may trim back the LIBOR interest rate. That's important for consumers because Bivens says, LIBOR is often used as a benchmark to help set rates for auto loans, credit cards and adjustable mortgages.

BIVENS: It's not like anyone's credit card payment is going to be reduced by 50 percent because of what they did. The question is what happens if they did not do this? And in that case you could have credit markets completely drying up. The rates consumers pay could skyrocket. I mean, essentially the Fed has taken out an insurance policy.

GERSH: The Fed also announced it will begin accepting as collateral securities that are backed by student loans. That could bring more cash into a market where money has been hard to find and for students who need a loan, that could pay next fall's tuition. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.