Analysis of The Fed's Treasury Bond Choice
Wednesday, March 18, 2009
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SUSIE GHARIB: Joining us now with more analysis, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and company. Welcome, both of you to NIGHTLY BUSINESS REPORT.
MICHELLE GIRARD, SR. ECONOMIST, RBS GREENWICH CAPITAL MANAGEMENT: Good evening.
GHARIB: Michelle, very aggressive moves by the Fed today. Do you think the Fed is doing the right thing by buying Treasury securities and mortgage-backed securities?
GIRARD: Well, I think that they are. They're adding liquidity into the system. And actually, you know, they're beyond the point of being able to lower interest rates. So now the goal is to bring down the rates that people borrow at, not just the banks lending to each other. So the goal here really is to help bring down mortgage rates and in that sense provide some relief to those homeowners that can refinance and perhaps even encourage some home buyers that may be on the sidelines to jump in.
GHARIB: Mike, the last time I talked to you, you said that it was a bad idea for the Fed to be buying Treasury securities. Are we going to look back and say, what was the Fed thinking? I mean what's the risk to this strategy?
MIKE HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Well, let me say, first of all, Susie, as of the close of business and the close of markets today, I'm wrong. And the markets loved this. And to go back to Paul Kangas's opening adjective, it's a very bold move on the part of the Fed. The problem is as Scott Gurvey was just talking about is the potential inflationary impact of this. It's only been tried once in recent history and that was 40 years ago. It didn't work very well. It was called operation twist. This time around since it hasn't been done, we may look back on this date as saying this gamble paid off. And we won't know because it hasn't been done. A week ago the UK did a little bit of it. It was well received. I think it was a masterfully done stroke by Ben Bernanke and we'll find out if it works. I certainly hope it does.
GHARIB: Michelle, you said a moment ago that it might be good for the housing market. Do you think that we'll see a jump in borrowing and mortgages and refinancing as a result of the Fed's move?
GIRARD: Well, I think it helps, but in the end this really boils down to the fact that home prices are down. On the one hand it does make homes very attractive but it does limit the ability of people to refinance and take advantage of these loans. A lot of people would go to the bank and want to refinance but they now they owe more than the home is worth and they're not able to take advantage then of the fact mortgage rates are down. And then of course the concerns that people have about their jobs. Whether or not they're going to have a job I think also has people looking and saying, wow, home prices are really attractive but I don't know if I'm going to be working in six months. So I think I better just stay steady for the moment. So I think it helps, all else equal, but I don't think it's going to solve the problems overnight.
GHARIB: Mike, will it help business owners? Will they go out and borrow more and expand their business? Will it help investors in any way?
HOLLAND: Yes, I think to follow up on Michelle's comments, Susie, I think jobs will remain the key as they've always been. And to the extent that business gets better, it ran into a wall in September 15 last year, headed over a cliff in the first quarter. Right now the Federal Reserve once again is buying paper there to lower the cost of doing business. Inventories are very low. It's entirely possible, the answer to your question is we won't find out if it's yes and businesses will do better creating jobs and therefore you'll start getting some real demand for houses. Having said that, Bernanke is the only one in Washington now that I see who is doing anything intelligent and bold. For the rest of them, that's a problem for business and for homeowners.
GHARIB: Go ahead, Michelle.
GIRARD: I was just going to say too, also going on what Mike said, it's so important here to try to bolster confidence. The Fed is dealing with what we call this negative feedback loop where the stock market goes down. Confidence goes down. People and businesses pull back and it leads into this negative downward cycle. We're trying to break that. So to the extent that we can offer optimism by showing that the Fed is being very aggressive and taking charge even though the administration may be somewhat floundering in here, I think to the extent that helps confidence. Also that is also going to be a real important point to this economy going forward.
GHARIB: All right, let me ask both of you this, talking about speaking optimistically. Ben Bernanke is saying that this recession is going to end by the end of 2009. Is that just optimistic talk or is that for real? Do you guys buy into that?
GIRARD: I do.
HOLLAND: Go ahead, Michelle.
GIRARD: I think given where we are and the actions that have been taken to date allowing some time for them to work we think the recession will end in the third quarter of this year.
HOLLAND: Susie, for me the answer is nobody knows including Ben Bernanke. He wasn't able nor were any of the leading minds in Washington able to tell us this crisis would occur. And I hope he's right as Michelle says and he may well be. In part if he is right it's because of what he's done.
GHARIB: All right Mike, real quickly in a few seconds, should investors put money in the markets now?
HOLLAND: Direct answer is yes. These cycles always have an end and we will have another up side. So the answer is I actually believe that the Federal Reserve is key to this because there's nowhere else to look right now. I think they probably will win and I think Bernanke will win.
GHARIB: All right. We'll check in with you soon. Thank you so much, both of you, for coming on the program.
GIRARD: Thanks, Susie.
GHARIB: My guests tonight, Michelle Girard, senior economist at RBS Greenwich Capital Management and Mike Holland of Holland and Company.
