Will economic stabilization act work?
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Alright, so, in the best case scenario, the Fed buys up outstanding mortgages.
That pumps more money into the market for new home loans.
The banks start lending.
That pushes interest rates lower.
More people start borrowing and buying.
And pretty soon we’re all, recession?
Well we asked our senior business correspondent Bob Moon to track down the answer to another question. Is this gonna work?
There is reason to hope this is more than wishful thinking. Standard and Poors chief economist David Wyss says although the credit markets are still in turmoil, the Fed has achieved limited success with similar actions. Such as, buying up corporate IOUs to get business credit circulating again.
David Wyss: Some of the programs have been effective. The Fed’s direct purchases of commercial paper, for example, seem to have freed up the commercial paper market. They’re hoping that this will do the same thing for the mortgage market.
But will this latest shot in the arm spur any more bank lending than all the others before it?
Gary Shilling: I don’t know. I can’t tell you.
Gary Shilling heads an investment advisory firm.
Shilling: They’d be delighted if lending were to pick up, but I think in reality they are simply trying mightily to stabilize the situation and prevent widespread financial collapse.
S&P’s David Wyss says this is uncharted territory, so nobody can be sure this will be effective. But he says policymakers can’t sit idly by.
Wyss: This looks like it should work. Let’s try it. If it doesn’t work, well, we try something else.
Still, investment adviser Axel Merk worries there are limits to how much the Fed can spend.
Axel Merk: Right now the Federal Reserve is pretty much the counterparty to all economic activity in the country, it seems. And that, by itself, cannot be sustainable.
Merk says the government needs to steady the credit markets, but should avoid propping up the economy. It might be painful, he argues, but only when housing prices and other markets hit bottom, can a true recovery begin.
In Los Angeles, I’m Bob Moon for Marketplace.
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