WASHINGTON – Among the problems the federal government is confronting in the credit markets are the unintended consequences of its previous rescue efforts.
The latest plan, announced earlier this week, is a case in point. The Federal Reserve Board unveiled a program to buy $100 billion of debt from the government-sponsored enterprises. Though officials said it would help bring down mortgage rates, it was needed because the government had inadvertently made GSE debt more expensive by adding an explicit guarantee behind bank debt. Fannie Mae, Freddie Mac, and the Federal Home Loan banks, without such an explicit guarantee, had to pay more to raise funds.
The move highlights the challenges policymakers face as they try to respond to a crisis with many fronts.
"You put your finger in the hole in one part of the dam and another hole opens up elsewhere and you have to put your finger there," said Mark Zandi, the chief economist and a co-founder of Moody's Economy.com. "You can see that with guaranteeing bank debt; it raised the cost for Fannie and Freddie. When you guaranteed money market funds, you guaranteed problems for banks and people shifted deposits."
When the financial crisis began, the government responded by addressing individual problems as they arose. But by mid-September Treasury Secretary Henry Paulson was under pressure to come up with a plan to stabilize the entire system. He convinced Congress to give him authority to spend $700 billion pretty much any way he saw fit. In the six weeks since the law was enacted, Mr. Paulson has careened from one idea to another and contradicted himself so many times that critics claim he has lost credibility. Observers said markets need a more consistent approach. "There is a school of thought that says on one hand, you need to be flexible and nimble to address a major crisis," said V. Gerard Comizio, a partner at Paul, Hastings, Janofsky & Walker LLP. "On the other hand, where is the plan? The marketplace is going to perceive certainty in plans … and certainty brings confidence."
