New plan could risk confidence in Fed

Alisa Roth Mar 12, 2008

TEXT OF STORY

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.

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