Global markets continued to fluctuate Tuesday, as the Federal Reserve announced plans to buy up short term debt in a bid to ease strain on the credit sector. Reporters and analysts examine the Fed's moves.
Read the Full Transcript
This day in the financial crisis began with the Federal Reserve. It took the unprecedented move to buy short-term debt to thaw out frozen credit markets. Fed Chairman Ben Bernanke laid out just how bad those conditions are during a speech today.
BEN BERNANKE, Federal Reserve Chairman:
Even households with good credit histories are now facing difficulties obtaining mortgage loans or home equity lines of credit.
Banks are also reducing credit card limits. And denial rates on automobile loan applications are reportedly rising.
Businesses, too, are confronting diminished access to credit. To support growth and reduce the downside risks, continued efforts to stabilize the financial markets are essential. The Federal Reserve will continue to use the tools at its disposal to improve market functioning and liquidity.
Judy Woodruff has more about the Fed's action.
And for some explanation and analysis, we are joined now by Lee Hoskins, former president of the Federal Reserve Bank in Cleveland. He's now a senior fellow at the Pacific Research Institute.
Alan Blinder, former vice chairman of the Board of Governors of the Federal Reserve, he is a professor of economics at Princeton University.
And Greg Ip, U.S. economics editor for the Economist magazine.
Gentlemen, thank you all three for being with us.
And, Greg Ip, I'm going to start with you. First of all, help us understand, what was the problem the Federal Reserve was trying to solve today?
GREG IP, The Economist:
OK, Judy. Well, a little bit of sort of a primer here.
Commercial paper is an IOU that corporations of all types and sizes issue on a routine basis to fund things like their inventory, their payroll, and their working capital. It's very common; it's very safe; and there's a lot of it.
As of just a month or two ago, there was $1.8 trillion of commercial paper outstanding. And it was primarily purchased by money market mutual funds precisely because it's so safe. Historically, there are very few defaults on this type of paper.
What happened, Judy, was a couple of weeks ago, when Lehman Brothers failed, many money market mutual funds found themselves holding short-term debt issued by Lehman. That caused them to register losses, and investors started to yank money out of those funds.
The funds became very reluctant or unable to purchase commercial paper at that point. And banks themselves, because they've been so much under stress, were not able to take up the slack.
As a result, many companies have been either unable to issue commercial paper at all or have only been able to issue it with maturities of one or two days at the most.
And with time, this could be a real problem, because companies will start to find it difficult to run their operations.
So, again, commercial paper, very short-term loan. So what exactly is the Fed doing about this?
Well, the Fed takes the view that companies that issue this paper are mostly quite healthy and they have good cash flow and there really isn't an issue of their ability to repay the money as it comes due.
What they think is going on is that many of the money market mutual funds and banks that would ordinarily purchase this paper don't want to, not because they think the company is going to default, but because they're not sure if in 90 days' time, when it comes time to basically reissue the paper, they won't find someone to do that.
And so they don't want to be the ones stuck holding the paper that cannot be rolled over.
The Fed has come out and said, if you can't roll over that paper, if you can't find someone to reissue it to, you can reissue it to us. We'll be the backstop. And they hope that creates some confidence.