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.

Marketplace is on a mission.

We believe Main Street matters as much as Wall Street, economic news is made relevant and real through human stories, and a touch of humor helps enliven topics you might typically find…well, dull.

Through the signature style that only Marketplace can deliver, we’re on a mission to raise the economic intelligence of the country—but we don’t do it alone. We count on listeners and readers like you to keep this public service free and accessible to all. Will you become a partner in our mission today?

Your donation is critical to the future of public service journalism. Support our work today – for as little as $5 – and help us keep making people smarter.