July 16, 2008 in Business

Leaders running out of options

By TOM RAUM Associated Press
 

WASHINGTON – The nation’s leaders are running out of answers to America’s economic crisis.

The Federal Reserve has no more practical room to push interest rates lower; there’s only so much taxpayer money for shoring up housing; and if depositors lose confidence, there’s little officials can do to stop a run on banks.

President Bush, speaking from a White House podium, and Federal Reserve Chairman Ben Bernanke, in testimony to a congressional committee, sought on Tuesday to soothe jittery markets and reassure Americans that the U.S. financial system remains basically sound despite the current turmoil.

Bernanke warned that “financial markets and institutions remain under considerable stress.”

Bush told a news conference: “The president doesn’t have a magic wand.” He was answering a question about soaring fuel prices but his remarks seemed to sum up the government’s overall predicament.

After years of seeming tame, inflation is again on the rise, led by higher food and fuel costs. But the Fed, which usually fights inflation by boosting interest rates, finds itself unable to use that weapon anymore – it already has pushed rates down to 2 percent from 5.25 percent in response to the housing crisis – without threatening to undermine an economy that is either in recession or growing anemically.

With soaring budget deficits, swollen from the costs of wars in Iraq and Afghanistan and increased spending on homeland security, there’s only so much taxpayer money for bailing out failing financial institutions.

“I fear that we’re sitting on a financial powder keg,” Bernanke was told by Sen. Richard C. Shelby of Alabama, senior Republican on the Banking Committee.

Mortgage giants Fannie Mae and Freddie Mac hold or guarantee about half the home mortgages in the United States. Their stocks have lost about 80 percent of their value over the past year. Over the weekend, the two were thrown a lifeline by the Treasury Department and the Fed. But if investor jitters prevent them from being able to sell bonds to finance new mortgages, it could have far-reaching economic consequences.

And the risk of runs on banks is still present, although minimized by federal deposit insurance on accounts up to $100,000 and by other federal safeguards.

Regulators seized IndyMac, a large California-based savings and loan bank, on Friday after hundreds of depositors lined up to withdraw funds at branches. The bank reopened Monday under federal control.

Bush counseled calmness. “I happened to witness a bank run in Midland, Texas, one time. I’ll never forget the guy standing in the bank lobby saying, your deposits are good. We got you insured. You don’t have to worry about it if you got less than $100,000 in the bank. The problem was, people didn’t hear. And there’s a … nervousness. My hope is, is that people take a deep breath and realize that their deposits are protected by our government.”

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