Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Disclaimer: The Parliamentary Library does not warrant or accept liability for the accuracy or usefulness of the transcripts. These are copied directly from the broadcaster's website.
Fed mounts another attack on credit crisis -

View in ParlViewView other Segments

Reporter: Stephen Long

ELEANOR HALL: The world's most powerful central bank is mounting yet another attack on the credit
crisis. In an extraordinary move, America's Federal Reserve is now buying the US Government's own
debt to try to inject money into the system.

The Fed will also take hundreds of billions of dollars' worth of mortgages off the books of many
troubled banks. Many say the move amounts to printing money. But will it work?

Joining us now to analyse this is economics correspondent Stephen Long.

So Stephen, is this the equivalent of the US central bank printing money?

STEPHEN LONG: Well in effect yes, Eleanor, but not literally. They're not actually physically
running the presses and sloughing off greenbacks. What they do is they basically create a liability
on one side of the Fed's balance sheet and buy in this case $300-billion worth of US treasury
bonds.

And the purpose of that really is with interest rates at zero or near zero in the US, they're
trying to push down the long-term interest rates on US Government debt. And a lot of interest rates
in money markets and financial markets have benchmarked off that so the hope is if they push down
those long-term interest rates, they push down the cost of money right across the spectrum and
hopefully get credit flowing again.

This is being seen as a radical step but Ben Bernanke, the Fed chairman has been talking about the
prospect of this for a long time and in one sense it's a step further along a road that they've
been travelling for two years now.

If you look at it now, they're basically buying up all manner of debt out of the markets -
mortgage-backed bonds and securities, consumer debt, whatever they can now, treasury bonds - to try
to get the flow of credit going again with the system just totally dried up.

ELEANOR HALL: But Ben Bernanke has also been arguing very recently that we're just months away from
an economic recovery, so why is he taking this step now?

STEPHEN LONG: Well, what central bankers say in public is often designed to inspire confidence.
Behind the scenes they must be worried about the fact that the US economy has cratered. We've seen
the worst statistics for 60 or 70 years. When you look at joblessness, consumer spending, all
manner of things, the US economy is clearly in really bad shape.

Now if he actually genuinely believes that the US economy will begin recovering again at the end of
this year or the second half of this year, as he's publicly stated, then he would have factored in
this extraordinary measure into that. He would have had in mind that the Fed was going to do this.

Because things are so bad that they need some sort of expansion in credit to create more
consumption and get jobs going again. Without this measure there's certainly no hope and even with
it, you have to question whether he's being very optimistic.

ELEANOR HALL: But in taking this move is there a danger that he will drive up inflation?

STEPHEN LONG: Well you hear a lot of people out there warning gloom and doom on the inflation front
from this but actually the purpose of this is to create inflation. They want to create inflation
because the real risk in the US and indeed across the world is a dangerous, debilitating cycle of
debt deflation.

Already you have a situation where the consumer price index has risen by just 0.2 of a per cent in
the US over the past year. That's partly because of a fall in petrol prices. But you've got very,
very sluggish increases in consumer prices and you've got asset prices - houses, stocks and the
like - falling backwards at a rate of knots.

They're worried basically that you get a cycle of inflation with asset prices falling, consumer
prices falling, and then people holding off spending money because they think prices will be
cheaper in a few weeks' time or a few months' time, mass unemployment and falls in profits and
wages. And guess what? The debt stays constant. And so that's what they're trying to avoid.

In the long run there is a potential threat of inflation because of the massive amounts of money
that Western Governments are spending to bail out the system, but that's in the long run and as
John Maynard Keynes said, in the long run we're all dead.

ELEANOR HALL: We're all dead. So will this work though to end the credit crisis and to bring the US
economy back into recovery mode by the end of this year?

STEPHEN LONG: The real honest answer that anyone could give is: who knows? We don't know. What we
can say is it clearly is having a positive impact. That's already obvious from what's happened in
the credit markets and on the stock markets. But will it rescue the world? Hard to say.

Really, one school of thought is that private debt is so large and the systemic problems are so big
that all this is just basically palliative care and it won't work.

And the other thing is that if you look at Japan, they tried this, forms of this, and it didn't
work. Now the US is saying they're going to go further but that may engender its own problems.

ELEANOR HALL: Stephen Long, our economics correspondent, thank you.