Fed keeps the lending window open
TEXT OF INTERVIEW
Kai Ryssdal: The Fed being the Fed, it doesn’t call its cash infusions into the U.S. banking system “cash.” Instead, it uses words like “primary dealer credit facility” and “discount window.”
But cash by any other name is still a whole lot of money and the Fed said today it’s going to extend its loans to pretty much any bank that needs cash into 2009.
Carey Leahey’s an economist with Decision Economics in New York.
Good to have you with us.
Carey Leahey: Thank you for having me.
Ryssdal: Why did the Fed make the decision today to extend this credit window?
Leahey: Well, essentially, the Fed has taken on a number of emergency actions that are wide ranging in scope and large in size and they decided to continue those actions even though they may not have the full authority from Congress and the administration to continue that, they decided the best thing to do was to keep these operations running because in some sense the financial markets still need the life support from the Fed, as evidenced by the problems we had with the housing agencies Fannie and Freddie just a couple of weeks ago.
Ryssdal: Does it imply a certain fragility of the financial system that maybe we’re not fully appreciating?
Leahey: Absolutely. The system, which has prided itself on innovation and the ability to obviously create money for a wide variety of people, has basically gotten stuck, clogged up, and is suffering under severe stress. While the economy as a whole may not be in a recession, Wall Street is certainly in a recession if not a depression given the conditions of the last year and a half, which echo those of 75 years ago.
Ryssdal: So the Fed’s been lending money for better than a year now trying to get the credit crisis unstuck. It’s tried to get banks confident enough so that they can then lend to each other and let the Fed get out of this mess. Is there any indication that that’s happening, that the banks are doing what they’re supposed to do?>
Leahey: I think there is. What we analysts look at are these so-called spreads between various financial assets…
Ryssdal: You mean spreads in interest rates, right?
Leahey: Spreads in interest rates, excuse me. These interest rates spreads have narrowed somewhat. They are wide by historical standards, but you always have the problem when you’re looking at these issues that if the Fed had done nothing, things would even be worse, so the fact that the system, which really just broke down, is sort of just crawling along, crawling right now on Wall Street is actually progress.
Ryssdal: The Fed, it seems to me, as a result of these actions and the Treasury Department now after the housing bill that the President signed today have their fingers in a lot of pieces of the free market pie. Are you worried about that?
Leahey: Oh, absolutely. I think that the ultimate risk is potentially a temporary — I hope — nationalization of the U.S. housing industry and much more significant regulatory oversight of financial institutions in general over the next two to five years. I think no matter who’s president a year from now, there’s a belief that somebody has to pay and Wall Street’s going to have to pay in the form of much more or what I hope is much more stringent oversight, because Wall Street has failed in the last few years.
Ryssdal: Carey Leahey’s at Decision Economics in New York.
Leahey: Thank you very much for having me. It was a pleasure.
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