Congress last week approved federal intervention that allows the government to buy up devalued assets from financial companies in hopes of unlocking frozen credit lines. Economist Ray Perryman says if bank borrowing rates go down and treasury rates go up, we’ll know the plan is working.
“Well, I think short-term what you’ll see is that financial institutions will again be in a position where they can loan money. So I think you’ll see some positive effects from this pretty quickly. This is a little bit maybe too much inside baseball, Ed, but one thing I would say: if you notice the federal funds rate—that is, the rate that banks use to borrow from one another — going down, at the same time the treasury rate goes up — which is the rate on government bonds — you’ll know this thing’s working, because that says banks are lending to each other and people are willing to do things besides just buy treasury securities.”
Leaders of the EU’s 27 member countries have pledged to take “all necessary measures to ensure the stability of the financial system,” — measures that could include liquidity from central banks, targeted measures for individual banks or a reinforcement of bank deposit guarantees. Perryman says the problem is international in scope.
“You notice right now that the Federal Reserve is pumping reserves in the system and so are European banks and so are Asian banks, central banks, and everyone realizes what’s at stake here and how important it is, and it’s very much a joint global effort to ensure that we keep the system functioning properly.”
But Perryman advises against overreacting to fluctuations in the stock market.
“If you don’t need the money immediately, don’t go cashing in stocks. The old rule is ‘buy low and sell high.’ Well, right now, if you sell, you’re going to be selling low, which is exactly opposite of what you should do. So unless you have to have the money immediately, try to ride this thing out and allow the markets to recover and some stability to be restored.”
Ed Mayberry, KUHF Houston Public Radio News.