Fed to buy toxic assets
This morning, the Fed said it will buy up to $500 billion worth of mortgage-backed securities to get home loans going again, while the Treasury will focus on other loans. Scott Jagow assesses the move with economist Bernard Baumohl.
Eyes of U.S. Treasury Secretary Henry Paulson (Karen Bleier/AFP/Getty Images)
More on America's Financial Crisis
TEXT OF INTERVIEW
Scott Jagow: It's getting a little frustrating trying to figure out what the government is up to here. Remember the Treasury said at first, it would buy mortgage-backed securities with the bailout money? Then, it said it wouldn't? Well now, the Fed is going to do it instead. The Fed says it will buy up to $500 billion worth of those awful securities hoping to get home loans going again. At the same time, the Treasury will focus on other kinds of loans -- car loans, credit cards. Hank Paulson will detail that plan in a few minutes.
We're joined by economist Bernard Baumohl. Bernard, let's start with this idea of trying to boost consumer credit. How important is that to the economy?
Bernard Baumohl: This is absolutely critical, because we are now in a race against time. We have seen the crash of mortgage-backed securities, and if the economy continues to deteriorate, and if the banking sector continues to suffer significant losses, we're going to see major reductions in the availability of credit on credit cards, on student loans, on auto loans. And if the securities that are backed by these sorts of assets begin to fall dramatically as well, then banks are just not going to make that money available. And that would mean that the economy would suffer a much more serious, much more prolonged downturn.
Jagow: But isn't that how we got here? Too much credit available for people who can't afford the car they're buying or the house they're buying, or whatever they're buying?
Baumohl: Well, for the last couple of years that has certainly been one of the problems. But what we have seen from discussions with the leaders within the financial community is they're now taking significant reforms, they're being much more prudent. Right now, there's virtually no credit available in some markets. And if that were to continue, there's no way that this economy can come back.
Jagow: And one more thing, on this buyout of mortgages from Fannie Mae and Freddie Mac. What influence do you think that'll have?
Baumohl: Well, that's difficult to say. We are looking desperately for any kind of sign that the economy is beginning to respond to some of these programs. And we haven't yet seen it, to be honest. About the best that can be said about the housing market is that at least we're seeing the inventory of unsold home begin to either stabilize or come down. So maybe, you know, the hemoraging has stopped in housing partly because of all of the funding and the stimulus that the Treasury has done with the banking sector.
Jagow: Economist Bernard Baumohl with the Economic Outlook Group. Thanks for joining us.
Baumohl: You got it, Scott.
Comments
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From Palo Alto, CA, 11/25/2008
More of the: " We have to stabilize housing prices" mantra. If the US economy really and truly is entirely reliant on home values, then it shows just how far we've moved away from having a productive economy and towards one tied to debt. The idea of home equity being used as a financial vehicle in which its value can be extracted like an ATM machine is itself unhealthy, yet so many people now rely on it that we're in the financial crisis such behavior created.
I am not at all or ever was in favor of bailing out mortgages. Secondly, if you have good credit, ample savings, a decent job, and a head on your shoulders, you can still buy a home within reason. Even today. Yet the Fed feels that we simply must enable MORE people to buy, which suggests two things:
A: First and foremost, housing prices are still too high. I know this is true because out here in the Bay Area of SF, while the ghetto areas as well as the far-flung exurbs are cheaper than last year, houses around the metro area in livable areas are still at nosebleed levels. They haven't fallen enough. SO let them fall and people with good jobs will be able to afford them again.
B:The avg American lacks savings and relies on above average credit risk to make purchases. I find this ironic. Now that Americans are saving money out of necessity, this is deemed a bad thing. Yet ultimately, if Americans build real savings, they can buy more with less credit risk.
The bottom line, as always has been is that corrections are necessary. That means pain now, reward later. What the Fed is doing now is only prolonging the pain because no matter what they do, housing prices will correct.
From Tampa, FL, 11/25/2008
Any bailout money that the government gives to troubled banks is just going to be sucked into inefficient operations of the bank and is not going to ease the credit market, or make banks more likely to lend money out. The government and the fed should look for ways to help the consumer directly. Maybe backing a percentage of the loans made out for home buying, or students, or energy efficient cars. Backing a 100% of loans would give the wrong incentive to greedy banks who have been thinking only in with short term goals in mind. But backing a percentage of a particular loan reduces the risk for the bank and makes borrowing money worth while again. The government can require the banks to keep their spread small if they receive such incentives.
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