Fed gives ill economy another injection

Jill Barshay Feb 12, 2008

Fed gives ill economy another injection

Jill Barshay Feb 12, 2008


Kai Ryssdal: The Federal Reserve doesn’t meet on interest rates for another five weeks, but that doesn’t mean Bernanke and company are sitting around eating bon bons.

The Fed plowed another $30 billion into the banking system today. The hope is that’ll convince everybody there’s plenty of money floating around so it’s OK to loosen up on lending.

Problem is the Fed’s boosted liquidity five times since December and nothing’s happened yet. We’ve got our New York bureau chief Jill Barshay with us to talk over the credit crunch and why it’s still hangin’ around.

Ryssdal: Hi Jill.

Jill Barshay: Hi Kai.

Ryssdal: So, Jill, once again today, we’ve got the Fed putting more money into the system, as I mentioned, they’re loosening interest rates, the government today again trying to do something about subprimes and foreclosures. The question to you this afternoon is how much good is it doing?

Barshay: Kai, remember what started this: subprime mortgages were defaulting and investors were running away from them. Well, in the past week, nervous investors have been refusing to buy all kinds of debt instruments. We’re talking loans to big U.S. companies with low credit ratings, municipal bonds, securities backed by student loans, car loans, commercial real estate — it seems like no part of the bond market is healthy right now and altogether, analysts are saying we could be entering a new phase in this credit crunch where banks start reducing their lending and it could choke off economic activity.

Ryssdal: But why? Why isn’t all this stuff that everybody’s trying to do working?

Barshay: Well it’s not default so much that has people spooked, but investors are fearing that there could be some more ratings downgrades, they’re worried about the problems with bond insurers and more importantly, they’re worried they’re not getting high enough returns from these securities right now considering the economic environment.

Ryssdal: So we really don’t know what we don’t know yet, right?

Barshay: Correct.

Ryssdal: What about the man on the street though? How is this credit squeeze affecting what happens in peoples’ daily lives?

Barshay: There’s nothing that keeps our consumer loan rates tied to short-term interest rates that the Fed sets. Banks don’t get to borrow money at the low, 3 percent Fed funds rate and lend it out to us. Instead, they’re focused on all the broken securities markets we’ve just been talking about and when banks can’t sell these securities, their cost of funds goes up and they get more tight-fisted with the rest of us. So it affects not just junky companies or people with low credit scores, but everyone. They’re tightening lending standards, they’re demanding higher credit scores, they’re taking on higher fees and they’re jacking up rates. A really good example is the credit card industry. They’ve doubled rates on some consumers and there are a couple reports that credit card rates have gone up to 30 percent for some people. And then there’s home mortgages. These are prime borrowers and mortgage rates haven’t even gone down a full percentage point since November and meanwhile, the Federal Reserve has knocked interest rates down 2 percent. It’s a similar story with car loans and student loans too.

Ryssdal: Wait, student loans? I mean, car loans you can figure. What’s going on with student loans?

Barshay: Well, just like mortgage banks and Wall Street banks, student loan issuers bundle up student loans and sell them off to investors and they haven’t been able to find investors who want to buy them lately. In fact, one company, a top 10 lender, just pulled out of the Federal Student Home Loan program all together. And so now they’re demanding high credit scores from 18-year-olds, they’re really tightening up their standards, jacking up fees and rates, I’m hearing.

Ryssdal: One more thing, Jill, before I let you go. You know, back in May and June and July when the credit crunch really was getting going, we were doing interviews and I would ask people “How long is it going to take for this whole thing to wash through the system?” and they would say, “Oh, I don’t know, six months, maybe by the end of the year.” Here we are in February. What are people telling you know?

Barshay: Well, we’re hearing that it could go on for a long time and that it’s not going to end in six months.

Ryssdal: Jill Barshay at the Marketplace bureau in New York. Thank you Jill.

Barshay: Thank you Kai.

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