President Bush, Bernanke Weigh In on Credit Crisis
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JUDY WOODRUFF: For weeks now, the problems in the mortgage markets have shaken the financial markets, causing new concerns over whether those troubles could spread to the rest of the economy. Much of the turbulence was caused by homeowners who took out so-called subprime loans, which are riskier, and are now unable to pay their mortgage.
Those loans came with lower, introductory adjustable rates that are now rising or due to rise soon. In some instances, that can double a monthly payment, and economists predict that as many as two million people with subprime mortgages will be paying higher monthly payments within the next two years.
Today, in dual appearances aimed at different audiences, President Bush and Federal Reserve Chairman Ben Bernanke made it clear they would step in to prevent problems with subprime mortgages from endangering the wider economy.
The president announced his proposal at the White House this morning. The plan, aimed at helping 80,000 delinquent homeowners who would receive federally insured loans, would take effect next year.
GEORGE W. BUSH, President of the United States: The government’s got a role to play, but it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford. Yet there were many American homeowners who can get through this difficult time with a little flexibility from their lenders or a little help from their government.
JUDY WOODRUFF: Some of that help would come from changes in the Federal Housing Administration, part of the Department of Housing and Urban Development, which insures loans to low- and middle-income borrowers. The FHA will have more flexibility to back refinanced mortgages for homeowners who have good credit.
GEORGE W. BUSH: In the coming days, the FHA will launch a new program called FHA Secure. This program will allow American homeowners who have got good credit history, but cannot afford their current payments, to refinance into FHA-insured mortgages. This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments, and keep their homes.
JUDY WOODRUFF: The president also wants the FHA to raise the dollar amount on loans it will back and called for tax code changes to eliminate penalties for refinancing mortgages. The plan also calls for an increase in transparency in the mortgage industry to help guard against predatory lending.
GEORGE W. BUSH: We believe, if the consumer is better informed, these kind of problems won’t arise or are less likely to arise in the first place.
JUDY WOODRUFF: An hour before the president unveiled his plan, the Federal Reserve Board chairman, Ben Bernanke, gave a widely anticipated speech at a bank conference in Wyoming. Bernanke said the Central Banking System would watch the subprime crisis and act as needed to limit the impact on the wider economy. He stated, quote, “It is not the responsibility of the Federal Reserve, nor would it be appropriate, to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy,” end quote.
Back in Washington, the chair of the Congressional Joint Economic Committee, Senator Charles Schumer, said he hoped to see stronger action from the White House in days to come.
SEN. CHUCK SCHUMER (D), New York: Just when it looked like millions of homeowners would be left with nothing more than a Hail Mary pass to save their homes, the president has decided to call a few plays from the Democratic playbook. This is a good and promising first step, but, of course, we must do more.
Stemming economic spillover
JUDY WOODRUFF: Both political parties are expected to take up the president's proposals and several other bills during the fall session.
And now some analysis of what President Bush and Federal Reserve Chair Bernanke had to say today. For that, we turn to Diane Swonk, chief economist at Mesirow Financial in Chicago, and Mark Zandi, chief economist at Moody's Economy.com.
Thank you both for being with us. Let's talk about what the Fed chairman said first. Mark Zandi, what did you take away from Mr. Bernanke's remarks?
MARK ZANDI, Chief Economist, Moody's Economy.com: I think he reaffirmed and even reinforced his predisposition to lower interest rates. And when they meet, the FOMC meets in mid-September, I think they will lower rates, and I think he cleared the way for the lower rates.
JUDY WOODRUFF: No caveats on that?
MARK ZANDI: Well, I guess the only caveat would be is if the economy performs much better than anticipated. But given what is transpiring in the financial markets and the impact that's going to have on the housing market and broadly on consumer spending and the economy, I would be very surprised if we don't see lower rates.
JUDY WOODRUFF: Diane Swonk, how did you hear what the chairman had to say?
DIANE SWONK, Chief Economist, Mesirow Financial: Well, I think Mark really hit the nail on the head. I mean, the issue is not only the economy and how it performs between now and September 18th, but this is a Fed that's trying to stem any spillover effects from Wall Street to Main Street. And in doing that, they actually have to get out ahead of the economic data.
And one of the points that Bernanke made today was how he was talking to people on the street, trying to get sort of more real-time information, which means, if the only thing that would stop the Fed from easing on September 18th is if, frankly, all the chaos that we've seen in credit markets is completely cleared out by then, and I just don't see that happening.
So I think part of this more stable environment we've seen as sort of an implicit promise the Fed has made to actually ease on September 18th, and I think I agree with Mark entirely that they will go ahead and do so.
JUDY WOODRUFF: So, in other words, no doubt in either one of your minds that the Fed would step in under the right circumstances?
MARK ZANDI: Not in my mind.
DIANE SWONK: No doubt, no.
Bernanke's different approach
JUDY WOODRUFF: And just to be clear, what are the circumstances you're talking about?
MARK ZANDI: Well, you know, I think the economy is soft. It's going to get softer because of the problems in the house market. I think inflation is low, and I think it's going to moderate further given the weaker economy.
And I think, given the turmoil in the financial system, which I still think is with us, I see no reason why the Federal Reserve would not lower interest rates in a couple three weeks. I suppose, if things turn out measurably better than anticipated, we won't get those lower rates, but I think at this point those low rates are coming.
JUDY WOODRUFF: And, Diane Swonk, the timing, the right timing, is that how the markets are reading it?
DIANE SWONK: I think absolutely. I mean, the Fed has also been very careful under Bernanke. Unlike Greenspan, here his biggest speech of his career was, you know, six to eight weeks after this crisis began, where Greenspan would have been out, inter-meeting moves, doing this ahead of time. But Bernanke's handled it very differently, been much more behind the scenes, and then finally came out just to underscore the message that the Federal Reserve came to by consensus, very different kind of approach, and trying to really make the ease at the meeting itself, in order to not have inter-meeting moves, and want to be a little more rule-driven.
With that said, you know, they want the effect to be the same as if Chairman Greenspan did when he moved between meetings and at the meetings during financial crises in the 1990s and in the late 1980s. So there's a similar end here, but the means is very different, and I think that's important, as well, is that, if the Fed were to fail on this sort of implicit promise they've given, it would really be very chaotic for financial markets. In fact, the only reason the Fed would not ease is really a significant improvement in not only financial markets but economic conditions between now and September 18th.
JUDY WOODRUFF: Well, you both mentioned the housing markets. Mark Zandi, let's talk about President Bush's speech today, efforts to step in to a degree to help homeowners who are in some trouble. What did you take away from what Mr. Bush had to say?
MARK ZANDI: Well, I think it was a good step. I think it was a small step. It's not going to help a lot of homeowners, if it stays as it is. But I think it's a step in the right direction. I think, once it makes its way through the Democratic Congress, the scope of the plan will be enlarged and more people will be helped. So I think it was much needed. I think it was well-timed. I think it was well-intentioned. I really think it's a good idea.
Substance of the president's moves
JUDY WOODRUFF: And, Diane Swonk, what was your take on the president?
DIANE SWONK: Well, I think Mark is a little more kind than I am. I take it more as cosmetic than actually real, in terms of the economy, in terms of its impact. I mean, this is really sort of pandering to the public and saying, "Here, I'm giving you something that at most is supposed to help 80,000 people," not the people who are most affected of the two million resets that are coming in adjustable rate mortgages out there.
I agree with Mark entirely that it would be broader-based once Congress gets a hold of it. But even then, at the end of the day, you know, Bernanke operates with a cannon, not a precise instrument, but nonetheless very powerful. And at this point in time, with what we saw today, I would put Bush sort of choosing squirt guns.
JUDY WOODRUFF: So, Mark Zandi, we just heard Diane Swonk say it was more cosmetic, the president was pandering?
MARK ZANDI: I believe she used the word "squirt gun," yes.
JUDY WOODRUFF: And the word squirt -- but that's not quite how you're viewing this?
MARK ZANDI: No, you know, the plan was more than just the expansion of the FHA program, which is important by itself, allowing the FHA to insure more loans and help people who are in delinquency. It also had the tax break for those homeowners who are able to reduce the size of their debt. If lenders allow them to reduce the size of the debt they owe, they don't have to pay tax on that. And it's hard to gauge how important that will be, but I think it will have an impact.
And I think the more important point here is that, as we go along, four, eight, twelve weeks from now, and if the housing market doesn't respond to these measures, I do think we will see even bigger steps. And I think the administration will go along with those steps, because this is very, very important to not only these homeowners, but to their communities and to the broader economy. And I think this is just the first step in what will be a series of steps to try to help these folks out.
JUDY WOODRUFF: And what makes you think the administration will do more, might do more?
MARK ZANDI: I think it will be necessary for them, both from a political perspective and for economic reasons. I think, if the housing market doesn't respond, the economy could very well slip into recession. And I think they understand that. And they know they still have some room to maneuver here and can become even more aggressive.
JUDY WOODRUFF: And, Diane Swonk, why don't you believe the president's steps carry much meaning? I mean, there was the tax break, the president is proposing, the reforms at the Federal Housing Administration, in general trying to make it easier for homeowners to refinance their mortgages.
DIANE SWONK: I'm not against any of that. But, you know, the idea -- he went further to argue that their job owning, you know, lenders to try to get them to move into fixed-rate financing products and get people to refinance so they don't adjust. Frankly, lenders are already doing that. They have a lot of incentive to do it in their own right.
The other issue is that these steps were very marginal. I'm not against them taking them, but they don't hit the bulk of the population that's going to be hit the hardest, and that's the subprime borrowers. They're targeting prime loans here, not subprime loans, and that's something that concerns me.
I do agree with Mark wholeheartedly that they will likely expand the program. And at the end of the day, I'm not as worried about the macro economy as Mark is from what's going on in the housing market and what happens, because I think we're going to stem losses there. I think the Fed has got the biggest guns in that arena.
But, with that said, I do think it is important to take those people who really were fraudulently put into loans they could not afford. There will be some bailout there, and I don't think that's necessarily bad at this stage of the game. I don't, you know -- economists don't tend to like things like bailouts, but this is -- we're talking about consumers that were sold loans they couldn't even make the first or second payment on, and that is clearly fraudulent behavior.
You know, they were given the American dream and then had it taken out from under their feet, and it's not that expensive. We're talking about some very low-priced housing. And so the cost isn't like an S&L bailout or something like that.
So I agree with Mark that it will be more broad-based, and I think that's important, but the -- you know, 80,000 out of 2 million that are going to turn and you're only hitting the prime borrowers at the moment, I guess from the Bush administration perspective, it's kind of like the New Deal and as close to FDR we've heard from him, not that I'm saying that's where we should go, but this is really very marginal in the scope of the economy at this stage of the game.
Role of Congress, White House
JUDY WOODRUFF: So just quickly, Diane Swonk, what more are you saying the administration should be doing, if anything?
DIANE SWONK: Well, it's not a question of really "should be." I think we're going to see a reaction. I think the biggest reaction that we see should come out of the Fed, to be honest with you. My concern always is when Congress and the administration gets into fixing problems after financial crises, they overshoot and tend to do too much and have unintended consequences that cost us somewhere else down the road.
So I worry in anything they move too quickly, because Congress is just not made to move quickly about financial market situations, nor is the administration, that they could do a misstep and really overshoot.
Some good things that could come out, I actually don't think it's a bad idea to, under a sunset clause, expand the amount that Fannie Mae and Freddie Mac can buy in the market, expand their portfolio limits. They could help restore the market that way. I do think there might be some need to also go up a little higher on the FHA loans, the insurance that they're providing there, go to a little bit higher level.
All those things, there's a lot they can do on the margin that combined will be more productive. Yes, that was a baby step. You know, I say squirt gun. I really don't find it that big of a deal. I guess personally I got offended when the administration actually at one point in time, the HUD secretary came out and said, "You know, we're basically the Calvary coming to save the day," and they are not that at all at this stage of the game.
JUDY WOODRUFF: So, Mark Zandi, pull together what the president said, what the Fed chairman, Ben Bernanke, had to say, all in all effect on the mortgage markets and effect on the economy more broadly?
MARK ZANDI: Well, I think it was a good day for policymakers. Both the administration and the chairman of the Federal Reserve stepped up. They did what they needed to do. I think the markets were cheered by it. I don't think, ultimately at the end of the day, it will be enough, and we will see more. The Fed will actually lower interest rates. And we'll see more out of the administration and Congress.
But I think it was a clear, direct step in the right direction. And I think we should be cheered by that.
JUDY WOODRUFF: And, Diane Swonk, just in summary together, things are better or not as a result of what these two, the president and the Fed chairman, had to say today?
DIANE SWONK: On that, I agree with Mark. They are better. And at the end of the day, whatever the message is, whether it's baby steps, big steps, it doesn't matter. At the end of the day, what Washington told us today from the Federal Reserve, the White House, and eventually from Capitol Hill is that they're not letting this economy go down without a fight. And I think they've got a lot of ammunition all together to deal with it.
JUDY WOODRUFF: All right, we are going to leave it there. We thank you both, Diane Swonk, Mark Zandi.