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Why the Fed should be decisive

Doug Krizner Mar 18, 2008


Doug Krizner: The Federal Reserve’s committee on interest rates meets today. A rate cut is a no-brainer, although there is some debate about magnitude.
Most in the market are expecting a full percentage point. That would be the biggest rate cut in a generation.

Let’s bring in Peter Morici, an economist on faculty at the University of Maryland. Peter, what’s your take on what the Fed has to do?

Peter Morici: It’s important for the Fed to be seen as acting decisively on the crisis. The market expects a 1 percent rate cut, it should deliver it.

Krizner: How do you see the economy right now, and the banking system as a whole?

Morici: The banking system is a depressive . . . is a crisis. The economy would obviously be greatly impaired by a failure of the banks. The Fed needs to act decisively in cooperation with the Treasury to rescue the banking system — not so much because the banks deserve to be rescued, but because the economy can’t function without it. Think of it like a city: If the water company has bad business practices, we might not have much sympathy for the stockholders and the management, but if the water company goes down, the city dies.

Krizner: What’s your remedy for the situation? How best would it be fixed?

Morici: The basic problem in New York is the banks are focused on creating highly complex financial instruments because they yield big profits. The incentive structure needs to be changed so the banks create transparent bonds based on mortgages that investors can understand and will accept, and so that the banks return to making solid, good loans as opposed to be financial adventures.

Krizner: Peter Morici is an economist and professor at the University of Maryland. Peter, thanks so much for speaking with us.

Morici: You’re quite welcome.

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