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Frenzy Of Worry Over Banks Eases Somewhat
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Frenzy Of Worry Over Banks Eases Somewhat

Economy

Frenzy Of Worry Over Banks Eases Somewhat

Frenzy Of Worry Over Banks Eases Somewhat
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The panicky mood sweeping Wall Street and Main Street a week ago has subsided somewhat. The Dow staged a strong comeback late in the week as it became apparent Fannie Mae and Freddie Mac aren't in immediate jeopardy, and that most banks remain financially sound.

LIANE HANSEN, host:

The news about the economy has been pretty unsettling lately. There was the failure of IndyMac Bank and the plummeting stock price of the mortgage giant, Fannie Mae. That spooked investors. The stock market tanked. President Bush and economic policymakers tried to calm fears and by week's end, people were shaking off their panic. Stocks were recovering. NPR's Chris Arnold reports on whether you need to be losing sleep over all of this.

CHRIS ARNOLD: If you turned the television on in the past week, you may have seen long lines of people nervous about getting their money out of IndyMac Bank branches. This was the coverage on KTLA News in Los Angeles.

Unidentified Woman: What is happening at this hour there, Eric?

Unidentified Man: Well, this particular branch and all of them, actually, opens at eight o'clock this morning and there's a little bit of tension here. We got people in line here behind this yellow tape.

ARNOLD: The image of a run on the bank seems pretty dramatic, but since most of the people on those lines don't have more than 100,000 dollars in their bank accounts, they're covered by the FDIC and they're not actually losing any money. Many just got jittery and wanted to pull their money out right away. And investors in the stock market have the same case of jitters.

Mr. BRIAN BETHUNE (Economist, Global Insight): That kind of a virus spreads through the system very quickly.

ARNOLD: Brian Bethune is an economist with Global Insight. He says the IndyMac collapse and worries over Fannie Mae quickly led investors to start dumping shares of lots of other companies.

Mr. BETHUNE: We had significant selling across all the financial stocks without any discrimination. Everybody was hit and then, you know, in the past couple of days there was kind of a reality check. So when we got pretty good results out of Wells Fargo, also J.P. Morgan, so you can't paint everybody with the same brush.

ARNOLD: Bethune said people should understand that IndyMac was a bank that specialized in risky loans, some with no income verification for the borrowers, so it was severely and unusually exposed to the housing mess. He says the vast majority of banks, while they're taking some losses, are still in much better shape.

Mark Zandi heads up MoodysEconomy.com. He, too, says people shouldn't get too worried about all this.

Mr. MARK ZANDI (Chief Economist and Co-Founder, MoodysEconomy.com): These events, they're nerve-racking, but for the average American they don't mean by themselves very much. You're still going to be able to get your money out of the bank and you're still going to be able to go to work and everything is going to go along as normal.

ARNOLD: That's not to say all this doesn't matter. Unlike IndyMac, Fannie Mae is the largest player in the mortgage market and so it's hugely important to the struggling economy. It is not about the collapse, but recent events shed light on a weakness within Fannie Mae. The company is not supposed to take big risks so it's not required to hold on to that much cash to protect against loan defaults. Brian Bethune says that kind of makes it like a guy on a bicycle that only has tenth gear. As long as the road is pretty flat, he's fine. But investors have been watching the road getting a lot steeper.

Mr. BETHUNE: Yeah, they're looking at this fellow on the bike and they see him going up the hill and he's huffing and puffing and sweating and he is making it. He's saying, don't worry, you know, I'm going to make it up this hill. And as it becomes slower and more difficult and he starts losing his breath, people start losing confidence and we don't really think this guy is going make it. He's going to stall.

ARNOLD: So that's why the federal government announced early Monday morning before the market opened that they would lend money to Fannie Mae. Basically, they're saying, we'll push you up the hill. So the company won't fail but Wall Street was still nervous about that underlying gear problem. So basically, Fannie Mae needs a new bicycle?

Mr. BETHUNES: Exactly. They need some new mechanics and we need to work on a plan for re-engineering that.

ARNOLD: Bethune expects that will get worked out. Still, all this volatility and uncertainty continues to put strains on the credit markets. And in the end, that will have the biggest impact on most people because if it gets even a little harder to borrow money, that keeps putting the breaks on the economy and making a recession more likely. Chris Arnold, NPR News.

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