The Fed, The TARP And The Economy

Krishna Guha, U.S. economics editor for Financial Times, discusses new developments in the Troubled Asset Relief Program (TARP) and Wednesday's announcement by the Federal Reserve that it intends to keep a key interest rate low for "some time."

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ROBERT SIEGEL, host:

While the stimulus plan aims to get the economy moving in the future, the Treasury Department still has the legacy of our subprime past to sort out and a few hundred billion dollars of TARP funds to work with. Today, Treasury secretary Timothy Geithner met with senior officials to discuss how to overhaul the $700 billion Troubled Asset Relief Program. After the meeting, Geithner told reporters that his department is looking into a range of options to get banks lending again and to stabilize the economy. But to find out about that range of options and what overhaul is expected at Treasury, we called on Krishna Guha, who is U.S. economics editor for the Financial Times. Hi, thanks for joining us.

Mr. KRISHNA GUHA (Economics Editor, The Financial Times): My pleasure.

SIEGEL: Are there strong indications yet of how Secretary Geithner will proceed with the TARP?

Mr. GUHA: Well, I think we need to divide that into two points. In the first instance, what Tim Geithner is trying to do is to restore public confidence in the process by which the government puts capital into banks. He's trying to reassure the public that it's going to be done in a transparent way with objective criteria and that the money that goes to the banks isn't going to be wasted, it's going to be used to support new lending. At the same time, he and his colleagues are working on plans for a comprehensive cleanup of the banking system, something that will almost certainly require more public funds.

SIEGEL: So, on the first point, I guess getting the city to not buy a new corporate jet would have been an example of that, what happened yesterday?

Mr. GUHA: Absolutely. There's concern among officials here that the public really has lost all faith in the TARP program. That's the program created by former Treasury Secretary Hank Paulson to initially buy troubled assets, then diverted into bank recapitalization. If the Obama team is going to really overhaul the banking system, the first thing they need to do is to win back the public's confidence that this money isn't wasted and that money that's going into the banks ultimately benefits everyone.

SIEGEL: Now, there have been hints at least that Secretary Geithner and the Obama administration is interested in the original strategy of the TARP, that is to go in and actually buy up the toxic assets. Secretary Paulson and his group found that impractical or exceedingly difficult. Is there anything different now that would make it any easier?

Mr. GUHA: It remains a very challenging job. The plan under consideration would involve some way of taking out the toxic assets that are clogging up the bank's balance sheets and deterring them from making new loans to households and businesses. Now, one of the ideas under consideration is to create a so-called bad bank. That's a special purpose bank which would exist just for the purpose of acquiring those bad assets.

Now, some of the problems that Mr. Paulson faced last fall haven't gone away. It's going to be very hard to value those assets to make sure that the banks are getting a fair price for them, but the taxpayer is not overpaying. And of course, this bad bank will have to raise quite a lot of funds potentially by issuing its own debt as well as taking money from Treasury in order to buy assets on the scale required. Plus, when we're all said and done, once the banks have gotten rid of their toxic assets, we may find they don't have enough capital, in which case we'll need to put more in.

SIEGEL: And we, the taxpayers, would be the owners of this Yucca Mountain for securities - this bad bank?

Mr. GUHA: That's right.

SIEGEL: Now, something else happened today which I want to ask you about, and that is that the Federal Reserve said it's standing by its virtually zero percent interest rates. It's hard to foresee anything that would force an increase in rates in the next few months. So what does the Fed do now, just issue the same statement every month?

Mr. GUHA: Well, as you say, it's a little bit tricky for the Fed because it's now in the realm of so-called unconventional easing. That's taking steps other than reducing the interest rate which is already set at virtually zero. And these steps don't lend themselves to adjustments every time the Fed meets, which is about every six weeks or so. But the statement today gives us some clues about its thinking.

The Fed wants to take further steps to reduce the actual borrowing rates. And its inclination is to try to do so through more targeted lending operations that are aimed to revitalize the securitized markets where a lot of loans are bundled up and sold on to investors. Those markets have been, by and large, frozen now for the best part of a year or year and a half. The Fed wants to get them going again.

It's also considering the possibility of extending a program by which it buys securities issued by Fannie Mae and Freddie Mac to keep mortgage rates low. And it's also said that it's prepared under certain circumstances to actually buy securities issued by the government, as well.

SIEGEL: Now, Krishna Guha, thank you very much.

Mr. GUHA: My pleasure.

SIEGEL: Krishna Guha of the Financial Times.

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