Will Fed solve crisis, or make it worse?

Ashley Milne-Tyte Mar 18, 2008
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Will Fed solve crisis, or make it worse?

Ashley Milne-Tyte Mar 18, 2008
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TEXT OF STORY

KAI RYSSDAL: The Federal Reserve — and more particularly, its chairman — have taken no small amount of criticism since the economy started slowing last year. In at least one regard, though, you’ve got to hand it to them… Sure, Wall Street’s lost some ground, but 1929 it ain’t.

But there are real worries more bank failures could be just around the corner. So what’s a central banker to do? Ashley Milne-Tyte went looking for some answers.


Ashley Milne-Tyte: That depends who you ask. Brian Gendreau is investment strategist for ING Investment Management. He says the Fed’s doing what it can to get cash into the market, including lowering interest rates.

Brian Gendreau: And I expect the Fed to do more of the same. I expect them to continue to ease, I don’t think they’re done. And I expect them to… be innovative in how they provide liquidity to the financial system.

That could mean more auctions and more flexible borrowing terms for banks. Cheaper money could help allay investors’ fears, and entice companies and consumers to start spending again. Chris Low, chief economist at FTN Financial, says the private sector is doing its bit too.

Chris Low: There have been efforts to add capital, there have been efforts to scale back risk, and all of that will continue. So the Fed doesn’t have to fix the problem. All they have to do is keep the markets functional until the markets fix themselves.

When that happens, he says, it might be time to regulate some of the darker corners of the credit markets. Christopher Whalen of Institutional Risk Analytics says it’s lack of regulation that got us the economy into this mess in the first place.

Christopher Whalen: The Fed and the comptroller’s office were asleep at the switch. They let the Street create this leveraged nightmare.

There’s plenty of support in the market for the Fed to cut rates further. But Whalen thinks that would be a mistake.

Whalen: They’re actually baking into the system the next crisis — because if we have to drop rates down to where they were earlier in this decade, you’re going to create another short-term bubble. And that doesn’t help anyone.

He says the Fed should continue to provide liquidity to the market in times of need, and leave it at that.

In New York, I’m Ashley Milne-Tyte for Marketplace.

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