New plan could risk confidence in Fed

Alisa Roth Mar 12, 2008


Doug Krizner: You gotta go back five years to find a stock market rally like the one we saw yesterday. The major U.S. indices each jumped more than 3.5 percent. All because the Federal Reserve unveiled a plan to fix the credit crunch. It’s worth $200 billion. And it lets big financial firms borrow from the Fed using mortgage-backed securities as collateral. But as Alisa Roth reports, there’s at least one major risk.

Alisa Roth: Mortgage-backed securities, you’ll recall, are what got the credit market into trouble to begin with. Now, though, banks and other institutions will be able to trade securities with a good credit rating for Treasuries. Or cash.

The Fed will also let institutions hang on to that money for a month. The idea is to put more cash into the market. And maybe convince others to buy mortgage-backed securities, too.

Ann Owen: Probably the biggest risk is, what if it doesn’t work?

Ann Owen is a former Fed economist. She teaches economics at Hamilton College. She says the Fed’s job is to keep the financial system stable. And for more than a decade, Americans have had faith in its ability to do that.

Owen: If they try many different things and it doesn’t appear to be working, then I think that the biggest risk that they take actually is that people lose confidence in the Fed, because that could have very serious long-term consequences for them.

This strategy may not work, some critics say. Just because the Fed’s ready to buy those mortage-backed securities doesn’t mean anyone else is.

In New York, I’m Alisa Roth for Marketplace.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.