Fallout: The Financial Crisis

Where will recovery programs take us?

Marketplace Staff Mar 19, 2009
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Fallout: The Financial Crisis

Where will recovery programs take us?

Marketplace Staff Mar 19, 2009
HTML EMBED:
COPY

TEXT OF INTERVIEW

Bob Moon: You almost can keep all these government fixes straight without a scorecard. So we’ve called in Kevin Flanagan to bring us up to date. He’s a money-market strategist with Morgan Stanley. Thanks for helping us out.

KEVIN FLANAGAN: Thanks for having me.

Moon: For those who haven’t been following every twist and turn this week, help us understand, if you will, the various programs that the government has put in place now, my mom would like to know. What are all these actions she’s been hearing about, and what do they all mean?

FLANAGAN: That’s a great way of putting it, but really what we’ve come down to now, the most important announcement, perhaps the most momentous of it all, was what occurred yesterday with the Fed’s decision to increase their balance sheet by almost $1.2 trillion. And within the process what the Fed is trying to do is to buy mortgage-backed securities, as well as treasuries in the open market. Now this is all intended to sort of kick start the housing market, to perhaps create or fuel a new wave of potential refinancing activity. So this is sort of a one-two punch by the Fed to not only continue buying these mortgage-backed securities but also buying treasury securities as well, in an attempt to make sure they can bring mortgage rates down even further from the levels that we’re seeing at this point in time.

Moon: Well, let me bring up some of those acronyms, the TARP and the TALF, and those sorts of programs, this latest move by the Fed, how does that fit with the big bailout if you will, the TARP?

FLANAGAN: Well, I think, what the Fed and the Treasury Department and the FDIC has been trying to do is use all of the means at their disposal. And instead of looking to do one step at a time, seeing what’s working and seeing what hasn’t been working, this appears to be an attempt now to use everything in your arsenal and try to come up with the optimal result. Now this program TALF, which is an asset-backed lending facility, it’s a way for the Fed to make things easier for this market to get back to a better sense of normalcy, only got started this week, so we don’t even know where this program will be taking us down the road. And that’s why I thought maybe the Fed would want to wait before they embark on another ambitious program, but obviously the Fed decided to come out with both barrels blazing.

Moon: Well, to paraphrase that old saying, a trillion here, a trillion there, pretty soon it adds up and turns into real money. Do we have any sense of how much has been spent so far now?

FLANAGAN: Up to this point, the Fed has probably grown their balance sheet in the area of, I would say, close to $2 trillion. With respect to the government involvement, you know you were looking at the troubled-asset relief program, the TARP, that was a $700 billion program, the FDIC has gotten involved as well, and is looking for a potential another $500 billion down the road, so it, as you say, it is mounting, it is building up.

Moon: We know there is no precedent for a lot of what they’re trying. How much does this amount to printing money and throwing it at the problem, and should we expect more spending?

FLANAGAN: Well, it is certainly printing money, and to some extent, throwing it at the problem. The Fed would probably argue vehemently that they’re not throwing it at the problem, that they’re targeting what they view as areas that need the help, the assistance, the stimulus. But you know, you can make the case if you go down this road, and you’re not getting your desired results, and that’s the key word I think, desired results, that maybe you did throw some money at this. That it wasn’t necessarily just a targeted approach. You know, the Fed, the $300 billion in buying treasuries, that may not be the end of it.

Moon: Kevin Flanagan is a money-market strategist with Morgan Stanley. Thanks for your insights.

FLANAGAN: Thank you very much.

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