Panic is over but not the problem

Kai Ryssdal Aug 23, 2007

Panic is over but not the problem

Kai Ryssdal Aug 23, 2007


KAI RYSSDAL: I’ll tell you what, I’ll lay out the financial news of the past couple of days. You decide whether things are OK or maybe not. In no particular order, we have relative calm in the markets; no bombshells from mortgage lenders — today anyway; and the bond market’s looking more stable.

On the other hand, the Federal Reserve is still pumping money into the financial sector to prevent a crisis. Countrywide CEO Angelo Mozilo, the man arguably at the center of the storm, says we’re headed for a recession. And lots of people are still banking on the Fed to cut rates.

I don’t know where you came down on whether the worst has passed or not, but we decided to call financial strategist Richard Bove at the investment bank Punk Ziegel for some guidance. Mr. Bove, thanks for being here.

RICHARD BOVE: My pleasure.

RYSSDAL: There’s been a certain sense the past couple of days of Ahhhh … that maybe we’re sort of past the worst of whatever this crisis was. Do you think that’s true?

BOVE: No, it’s not even remotely close to being true. I think that basically what we learned in the past three to five days is that holders of funds got frightened because they didn’t know what they owned and because they were losing money on certain portions of these investments. The Fed stepped in and is trying to take us over that period of stress. However, it still doesn’t solve the problem that somebody has to come up with the money to make the payments on these different forms of debt which are outstanding in the economy.

RYSSDAL: Cast your mind forward now with me to the 18th of September when the Federal Open Market Committee talks about interest rates. What happens if they don’t cut the Federal Funds Rate on that date?

BOVE: The real issue is that, you know, we need economic growth. And economic growth is gotta stimulate income growth, which is gotta solve the problem. On September 18th, I think the Fed is going to reduce the discount rate by another 50 basis points.

RYSSDAL: That is to say they’ll cut the discount rate — the rate they cut last Friday — by another half a percent.

BOVE: Correct. And they won’t touch the Federal Funds Rate. Now the reason why I’m saying that is because we had a very odd development in the market yesterday. The Federal Reserve requested that the four largest banks in the United States borrow $500 million apiece at the discount window. The reason why that was somewhat bizarre is because none of these banks needed that money. Why would the Fed do that? The stated reason is because the Fed wants to create confidence among other banks that they should also borrow from the Federal Reserve discount window.

RYSSDAL: That all goes back, though, to the reason we called you up to begin with. Which is, the idea that what’s happening as these very public moves are made is in some sense a confidence game in the most pejorative sense of the word.

BOVE: Yes, you’re right. In other words, basically, the money is there. It exists. The problem is that the holders of funds have lost confidence in the system and therefore do not want to lend it. And what the Fed is attempting to do is break the logjam to allow people to use their money to put it back in the system. Once it’s achieved that result, then it has to start working, if it can — and I don’t think it can — on the real problem. Which is, how do you get enough income in the economy to actually meet the debt-service payments?

RYSSDAL: And we just don’t know yet, right?

BOVE: No, we don’t. We don’t know that.

RYSSDAL: Richard Bove is a financial strategist at Punk Ziegel. Mr. Bove, thanks a lot for your time.

BOVE: Thank you.

RYSSDAL: Countrywide shares rose about a percent today, if you’re keeping track. Otherwise, it was a muted day on Wall Street. We’ll have the details when we do the numbers.

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