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Amid Takeovers, Government's Load Examined

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Amid Takeovers, Government's Load Examined

Economy

Amid Takeovers, Government's Load Examined

Amid Takeovers, Government's Load Examined

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  • <iframe src="https://www.npr.org/player/embed/94771339/94771311" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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The Federal Reserve and the Treasury Department are involved in the takeover of Fannie Mae and Freddie Mac. The Fed is also the potential owner of American Insurance Group. Its capacity to handle the takeovers is examined.

MICHELE NORRIS, host:

From NPR News, this is All Things Considered. I'm Michele Norris. Today, the stock market posted its biggest one day gain in six years. The Dow shot up more than 400 points after a series of mad days. All it took was a rumor that Treasury Secretary Paulson might create a federal entity that would deal with the bad debts of banks.

This evening, Paulson and Federal Reserve Chairman Ben Bernanke briefed congressional leaders. Members of Congress had complained of being left in the dark about the Bush administration's use of taxpayer dollars to address the crisis. After the meeting, Paulson said there is bipartisan cooperation to try to resolve the country's financial problems and that plans are in the works to rescue banks from bad debt. Senate Majority Leader Harry Reid said he expected the administration and the Fed to have a proposal to lawmakers in a matter of hours.

This morning, the Federal Reserve and other top central banks injected huge amounts of cash into the financial system. The question remains how much can the U.S. government do to stave off what's become a global crisis. NPR's John Ydstie has this report.

JOHN YDSTIE: Before today, the Federal Reserve had already pledged 300 billion dollars of its assets to propping up, rescuing, or taking over ailing financial companies. Then, this morning came word that the Fed was increasing the amount of dollars available to central banks around the world by 180 billion. Now, you might ask, isn't there a limit? Won't the Fed run out of money?

Dr. ALLAN MELTZER (Professor of Political Economy and Public Policy, Carnegie Mellon University): No, the government won't run out of money. The Fed prints money. I mean, that's part of its function.

YDSTIE: That's professor Allan Meltzer, a Federal Reserve expert at Carnegie Mellon University. Not all the Fed's money simply appears out of thin air, however. It has a balance sheet of assets worth about 925 billion dollars made up of U.S. Treasury securities and private securities. But, in the case of the dollars being made available to foreign banks today, they may involve dollars created out of thin air, says Vincent Reinhart, former director of monetary policy at the Fed.

Mr. VINCENT REINHART (Former Director of Monetary Policy, Federal Reserve Bank): It's a line of credit, a swap line. The central banks may not be using it, so they haven't necessarily been drawn. When they're drawn, that's money out of thin air.

YDSTIE: But that doesn't mean the money being pledged is free money. In the end, it will almost certainly add to the national debt. But it's not as simple as adding up all the money pledged in the rescues or injected into the financial system. As Reinhart said, the money made available to central banks today was in the form of lines of credit, loans that will be paid back, and the 200 billion dollars the Treasury has pledged to rescue Fannie Mae and Freddie Mac probably won't end up all being spent because some of the assets the government now controls in Fannie and Freddie are worth something. But the cost could still run to 100 billion dollars or more. And Reinhart says that will put pressures on our political system.

Mr. REINHART: What that means is people running for office right now have to appreciate their ambitions for what happens when they get in to office. They're going to have to be reined in, whether it's spending increases or tax cuts.

YDSTIE: So this financial crisis could require the U.S. government to tighten its belt or face the prospect of seeing its debt downgraded like a third world country. As for the question of whether the Federal Reserve has the management wherewithal to oversee AIG and whatever else comes down the road in this crisis, Reinhart says it may be contracted out or handed off.

Mr. REINHART: Just as they delegated the running of the Bear Stearns funds to a private manager, you could imagine them delegating the responsibility to someone else in the official sector. And yet, the bottom line is, this was an improvisation at a time of stress. They haven't dotted the i's and crossed the t's.

YDSTIE: For his part, Professor Meltzer says he thinks the Federal Reserve should not be taking on these responsibilities. If the government wants to bail out these failing firms, he says, the Congress should appropriate money and appoint managers to do it. John Ydstie, NPR News, Washington.

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