TOPICS > Economy

Attempts to Ease Credit Crunch Reveal Mixed Results

October 21, 2008 at 6:10 PM EDT
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Several plans have been enacted in recent weeks to loosen the flow of credit and ease the financial crisis. An expert panel evaluates the efforts and the state of the credit sector.

JEFFREY BROWN: Much government effort and public attention has been aimed at the worldwide lending squeeze. Consider that just a few weeks ago, few of us ever tossed around a term like LIBOR, the rates at which banks lend to each other.

There seem now to be some hints of a credit market thaw, but how much and to what effect?

We update the situation now with Karen Shaw Petrou, managing partner of the consulting firm Federal Financial Analytics; Diane Swonk, senior managing director and chief economist for Mesirow Financial, a financial services firm in Chicago; and Andrew Ross Sorkin, reporter and columnist for the New York Times. He also edits the DealBook blog on the Times’ Web site.

Karen Petrou, I mentioned LIBOR, that lending rate between ranks has dropped to its lowest level in over a month. That’s a good thing, right?

KAREN SHAW PETROU, Federal Financial Analytics: That’s right.


KAREN SHAW PETROU: LIBOR means the rates that banks charge each other. And we can’t get the money until the banks do. And we can’t get it at a rate that we want or that the economy can benefit from until the banks are able to move the money at the lowest possible cost.

JEFFREY BROWN: And so now, what can they — they lend to each other at a better cost?

KAREN SHAW PETROU: If this stays down — the markets have been terrifically volatile. So while the news is very, very good, it’s far too soon in these strange and strained market times to look too far ahead.

I’d say this is so far, so good. And the way the markets have been, that’s the best we’ve seen in a really long time.

JEFFREY BROWN: All right, Diane Swonk, well, first, I mispronounced the name of the company. It’s Mesirow. Sorry about that.

Do you see signs of — do you see signs of a thaw?

DIANE SWONK, Chief Economist, Mesirow Financial: You know, there are very marginal signs of a thaw. I think the real important issue here is, as we already noted, that banks are finally lending to each other, but we’re not seeing it on Main Street yet.

The moves by the Fed today are critical but we saw nameplate companies like Caterpillar not be able to get funding, and over time that means not be able to get funding for payroll on perfectly viable companies.

We saw a lot of retailers not be able to get funding for their inventories for the holiday season. Many are going to be closing their doors or not doing seasonal hires, actually firing people before the holiday season comes.

I think these are very critical issues, because they’re also not getting the financing to offer those 0 percent financing deals that we want — we usually see during the holiday season, all those flat-screen TVs that are usually financed on 0 percent financing.

Many people thought that would be a big seller this season because of the change to HDTV in February. Those deals are going to be much fewer and far between because of the credit market situation and the slow rate at which it will reach Main Street again.

Banks keeping capital in-house

Karen Shaw Petrou
Federal Financial Analytics
We don't need bigger banks; we need stronger banks.

JEFFREY BROWN: And, Andrew Sorkin, what do you see out there? What's your reading?

ANDREW ROSS SORKIN, New York Times: Well, I think that we are seeing the right steps being made. But at the end of the day, you know, they may become -- they're advertised as if they're a quick fix, a silver bullet, and they're not.

And I think that consumers and Main Street need to appreciate what we're really getting ourselves into. You know, the Treasury is giving $250 billion to the banks ostensibly to lend out, but it's not going to come to you or I anytime soon.

In fact, more often than I'd like to say, they're going to keep that money and hold onto it, in part because they are expecting to have losses, and so they need that capital.

JEFFREY BROWN: Explain that a bit, Andrew -- I'm sorry -- because you wrote today in your column that banks were actually hoarding the money, holding onto it.

ANDREW ROSS SORKIN: Well, that's exactly right. They're going to be getting this capital from the government, ostensibly, as I said, to lend it. However, they're not going to use it for that purpose, at least in the immediate term.

They're going to use it and hold onto it, in part because they're expecting losses at their own firms. And so they have capital requirements, which means they have to have a certain amount of money in the bank.

And if they know that they're going to be losing money in the future, they need to hold onto that money.

The other thing that some of them may do with that money is go out and make acquisitions and buy other banks. Now, that's not a bad thing, because it will make some of these banks stronger, but it means that you will not be getting this money into your pocket anytime soon.

JEFFREY BROWN: Now, Karen Petrou, I mean, we talk about banks in a general way, and I think we're all coming to realize that there are banks and then there are banks, right?

I mean, some banks are in real trouble, some not. Some are huge. Some are small. I mean, how do you think about what's going on in the banking world right now?

KAREN SHAW PETROU: I think it's a very unsettled time. And I agree with Andrew about the uses to which the banks will put the money.

I really do wish that the banks were putting the money into the economy or propping themselves up. It troubles me very much that Treasury is going to let banks use this money to buy other banks. We don't need bigger banks; we need stronger banks.

If a bank can afford to buy another bank profitably, it should do that with its own money, not with ours. And if it's in that weak of a condition, then we need to face up to that, hand it over to the FDIC, and let's move on.

We've got to be very disciplined in how that $700 billion is used. It's a critical, critical decision for getting the economy going.

Lacking incentive to lend

Andrew Ross Sorkin
The New York Times
I think the larger issue is the economy and these banks, in terms of lending, are not going to start lending real money until the economy turns.

JEFFREY BROWN: In fact, Diane Swonk, there were reports that Treasury was sort of pushing or encouraging more banks to merge. Do you see that as a good idea?

DIANE SWONK: Well, I think the issue is, it's the lesser of two evils. If the FDIC were to absorb all of these deposits from the number of banks that could fail, especially against the backdrop of what Andrew talked about, a deteriorating economy, more defaults, more loan losses in their own balance sheets, that would cost us all more money.

So it really is the lesser of two evils, although I don't like the answer, either. The reality is to go ahead and allow the mergers, allow some of the acquisitions to occur that will strengthen the system for now.

But I also -- I think it's very important to point out the other issue that's come up of -- we already had too big to fail. Now we have too, too big to fail. And that's going to be the next phase we're going to have to deal with over the next 12 months.

JEFFREY BROWN: Yes, Andrew, weigh in there, I mean, the too big to fail and too, too big to fail?

ANDREW ROSS SORKIN: Analysis. I mean, we do have this issue, which is we're going to create monster banks. And that is either a great thing...

DIANE SWONK: We already have.

ANDREW ROSS SORKIN: ... or potentially a very bad thing, depending on what happens. But I think the larger issue is the economy and these banks, in terms of lending, are not going to start lending real money until the economy turns.

You know, the old joke on Wall Street is, you only lend money to people who don't need it. And in this environment, there's a lot of people who don't need it.

The IBMs and the GEs of the world, they'll get their money, but the rest of us probably won't get it soon. And when you talk about mortgages, when you talk about auto loans and all of those issues, and you start thinking about the economy going forward, you know, if we really do have a recession, we have a bigger problem on our hands.

JEFFREY BROWN: But, Andrew...

ANDREW ROSS SORKIN: And so we'll be having -- yes.

JEFFREY BROWN: No, I'm going to say, I might be missing something, but it seems like a circular argument to me. We need a loosening of credit...

ANDREW ROSS SORKIN: Right, absolutely.

JEFFREY BROWN: ... to jumpstart the economy, but the banks won't lend, you're saying, because of the weak economy?

ANDREW ROSS SORKIN: Exactly. And that is the ultimate conundrum that the Treasury and Fed face, which is, they are at loggerheads here about, what do you do in this environment? Because it's a circular and vicious cycle, is what's really at play here.

JEFFREY BROWN: Go ahead, Diane.

DIANE SWONK: I just want to add -- I think it's really important -- Andrew brought up a really important point here -- if they do nothing, it adds insult to injury.

We're in a recession. The best scenario -- we're choosing the lesser of two evils here.


DIANE SWONK: The best scenario is that we mitigate the recession. And it does underscore the need for another fiscal package, a fiscal stimulus package. My preference is towards infrastructure and jobs.

But I think there's a very important issue here, that the larger issue is you are easing credit into a condition where fewer people qualify because the economy is deteriorating underneath us.

I've never seen such a rapid deterioration in the macro-economy, on Main Street from Wall Street, in such a short period of time in my career.

Proper targets for federal dollars

Diane Swonk
Mesirow Financial
... these are high-quality companies, viable companies, and they're trading them for government securities, Treasury bonds, to be safer, to keep their investors in place.

JEFFREY BROWN: Diane, just stay with you, because I think you mentioned earlier this move by the Fed today regarding the money market mutual funds and commercial paper. Explain what that's about and what it's intended to do.

DIANE SWONK: Well, what's really critical here is many of the mutual funds have been selling off their high-quality commercial paper, nameplate brands, you know, used to be what we consider AAA.

We don't know what the ratings mean anymore, but these are high-quality companies, viable companies, and they're trading them for government securities, Treasury bonds, to be safer, to keep their investors in place.

That said, it means a lot of companies that have relied on this money, this short-term money, for daily business operations are not getting it. And as a result, they're having to cut back on their operations unnecessarily, adding insult to injury, in terms of the recession, adding job losses.

So the hope is that, by the Fed stepping into the commercial paper market, maybe you can mitigate some of those job losses and stabilize the situation, but the best we're doing is putting a floor on the recession. We're not moving up yet, and that's where the difficulty of all this is.

JEFFREY BROWN: Karen Petrou, do you see that as a smart move or a helpful move?

KAREN SHAW PETROU: I think, when the Fed throws $500-plus billion into the economy, we better hope it works. It's clearly -- I agree with Diane. The money market funds situation is a very serious one, and it's why, at the outset, the question you asked about LIBOR, that alone is not confidence-building.

It's good. It's certainly better than we've been. But there are too many other dislocations and disruptions in the credit market now to take real comfort from anything.

JEFFREY BROWN: So, Andrew, I mean, we keep talking about everything here is sort of unprecedented, but how much do we know about how long it takes to move back to a more normal situation of lending?

ANDREW ROSS SORKIN: Oh, I wish I could tell you. I really do think it has to do with when the economy turns and if it turns. You know, we could be looking at a recession that only lasts 12 months, and I think that would be great news if that was the case. But as we all know, it could last much longer than that.

You know, the one thing I would say is, you know, we've cast sort of doom-and-gloom on the packages that the Treasury has put forward so forth. It's not dumb proposals. They're actually very smart, and they will go a long way towards pushing us in the right direction.


ANDREW ROSS SORKIN: But the point is that they don't necessarily prop us up even higher. I think they do set the floor, as one of the other panelists said.

But I think, in terms of the next step, you may need another stimulus package to get where you want to get to.

Stimulus may jump-start economy

Karen Shaw Petrou
Federal Financial Analytics
If there are impediments in the market, we need to get Fannie Mae and Freddie Mac back working. Let's focus on that.

JEFFREY BROWN: So, I mean, it's not a matter just of waiting for the steps they've taken so far to kick in? You're saying we might need more.

ANDREW ROSS SORKIN: We might need a little bit more, I hate to say that.

JEFFREY BROWN: And Diane Swonk?

DIANE SWONK: Chairman Bernanke said it this week. We need more. That's all there is to it.

And at this stage of the game, you don't want to risk losing anymore than we've already lost. We've already got to undo much of the damage that was done in the recent weeks, and we do have a recession underneath us.

We need to throw everything we can at it to mitigate the human toll, as well as the financial toll, ultimately, to the deficit. I know people don't understand this, but the cost-benefit of not doing something -- it will cost us much more over the longer haul to endure the kind of losses we're talking about than to mitigate them at this stage of the game.

JEFFREY BROWN: And, Karen Petrou, we talked about the stimulus package last night's show, but are there other things that you look to, to the government, particularly on the credit markets now?

KAREN SHAW PETROU: I think the government needs to be careful. We are throwing hundreds and hundreds of billions of dollars. And I think we've got to be very conscious of the short-term need.

But just like in the summer, we sent out rebate checks, and everybody got $300 and spent it. Let's focus on what we can do to build long-term stability, jobs now, through getting the credit markets flowing.

If there are impediments in the market, we need to get Fannie Mae and Freddie Mac back working. Let's focus on that. We need to get the banking system going. The $700 billion ought to be a heck of a start. It's a lot of money. If we need to do more, let's do more.

Let's look at infrastructure, as I know you're doing later tonight. But let's focus on the long term, because short-term fixes might make us happy, but they could just cost us money without the kind of long-term return we have to have.

JEFFREY BROWN: OK, Karen Shaw Petrou, Diane Swonk, and Andrew Ross Sorkin, thank you all very much.