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This credit crunch, too, shall pass . . .

Kai Ryssdal Aug 7, 2007

This credit crunch, too, shall pass . . .

Kai Ryssdal Aug 7, 2007


Kai Ryssdal: Nowhere in the Fed’s statement this afternoon was there any hint of doing anything about the shakiness in the economy. To keep it contained, as Mr. Bernanke and Treasury Secretary Hank Paulson have been talking about the past couple of weeks.

We got Greg McBride from on the line to chat about that. Greg, were you surprised by the Fed’s statement?

Greg McBride: No, I mean, I think what they’re doing is, you know basically it’s you know Daddy telling the teenager, “Yeah, yeah, I hear ya, but you know, you’re problems aren’t as big as you think they are” kinda thing. You know, the reality of it is, it’s not something that’s impacting all households. It’s only impacting some households and businesses — albeit I think some more than the Fed would really like to see. It’s perhaps not as contained as they had hoped or expected just a couple of weeks ago.

Ryssdal: All right, well let’s look at some of those examples of, you know, not being contained. There is the volatility in the market. We’ve got all kinds of deals, big deals on Wall Street being pushed back. You know, investment banks are gonna lose some money because some of these deals aren’t happening. I mean, there’s a wider leakage thing happening here, don’t you think?

McBride: Well, I think the best example of that is what we’re seeing in the jumbo mortgage market. What’s happened over the last week or so in the jumbo mortgage market is that borrowers that are taking out more money than the $417,000 threshold that Fannie Mae and Freddie Mac usually used to buy mortgages are having to pay higher rates. And why is that? Because investors are suddenly accounting for risk — or even the perception of risk — and as soon as cooler heads prevail among investors, they’ll realize that it’s . . . there’s not a good basis to be marking those rates up as high as they are for borrowers who have demonstrated and continue to perform admirably with very good credit quality and timely payments.

Ryssdal: No pressure here, Greg, but investors are not known for having cooler heads.

McBride: Ha-ha. Well, we’ve seen a lot of that evidenced in the stock market lately with the wild ups and downs. But, you know again, I think a lot of this is characteristic with a transitioning economy. Sort of the uncertain landscape as it pertains to the housing market and just what tact the Fed is going to take in the months to come.

Ryssdal: Pull it back for me for a second and look at some of the bigger issues that have gotten a lot of the press. Bear Stearns and the trouble it’s been having with some of its hedge funds, American Home Mortgage, those sorts of things.

McBride: Well, you know, I think a lot of this is you live by the sword, you die by the sword. You know, a lot of lenders weren’t as stringent as some of their competitors. A lot of investors weren’t as vigilant about risk as some of their competitors. And that’s really what you’re starting to see is that risk is now starting to bite back. And it’s those that were out on the edge of the diving board with their tippy-toes over the edge that are, you know, they’re most likely to fall into the pool at this point.

Ryssdal: On the topic of risk, actually, how much risk do you think the Fed is taking here as, when it says, as it did today in essence, caveat emptor — you know, you guys look out for yourselves?

McBride: The Fed’s not gonna come right out and say this, but they do not want to be in the position of winning the battle of economic growth but losing the war of inflation. And right now, their primary focus is what they call price stability, what you and I call inflation. They’re focused on keeping inflation low. And if they do that, that bodes well for the economy over the long term, even if we do have some short-term bumps in the road.

Ryssdal: Greg McBride at, he’s a senior financial analyst there. Greg, thanks a lot.

McBride: Thank you so much, Kai.

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