Fed to buy toxic assets

Eyes of U.S. Treasury Secretary Henry Paulson

TEXT OF INTERVIEW

Scott Jagow: It's getting a little frustrating trying to figure out what the government is up to here. Remember the Treasury said at first, it would buy mortgage-backed securities with the bailout money? Then, it said it wouldn't? Well now, the Fed is going to do it instead. The Fed says it will buy up to $500 billion worth of those awful securities hoping to get home loans going again. At the same time, the Treasury will focus on other kinds of loans -- car loans, credit cards. Hank Paulson will detail that plan in a few minutes.

We're joined by economist Bernard Baumohl. Bernard, let's start with this idea of trying to boost consumer credit. How important is that to the economy?

Bernard Baumohl: This is absolutely critical, because we are now in a race against time. We have seen the crash of mortgage-backed securities, and if the economy continues to deteriorate, and if the banking sector continues to suffer significant losses, we're going to see major reductions in the availability of credit on credit cards, on student loans, on auto loans. And if the securities that are backed by these sorts of assets begin to fall dramatically as well, then banks are just not going to make that money available. And that would mean that the economy would suffer a much more serious, much more prolonged downturn.

Jagow: But isn't that how we got here? Too much credit available for people who can't afford the car they're buying or the house they're buying, or whatever they're buying?

Baumohl: Well, for the last couple of years that has certainly been one of the problems. But what we have seen from discussions with the leaders within the financial community is they're now taking significant reforms, they're being much more prudent. Right now, there's virtually no credit available in some markets. And if that were to continue, there's no way that this economy can come back.

Jagow: And one more thing, on this buyout of mortgages from Fannie Mae and Freddie Mac. What influence do you think that'll have?

Baumohl: Well, that's difficult to say. We are looking desperately for any kind of sign that the economy is beginning to respond to some of these programs. And we haven't yet seen it, to be honest. About the best that can be said about the housing market is that at least we're seeing the inventory of unsold home begin to either stabilize or come down. So maybe, you know, the hemoraging has stopped in housing partly because of all of the funding and the stimulus that the Treasury has done with the banking sector.

Jagow: Economist Bernard Baumohl with the Economic Outlook Group. Thanks for joining us.

Baumohl: You got it, Scott.

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