Panel III of a Hearing of the House Financial Services Committee - Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and of Government Lending and Insurance Facilities; Impact on Economy and Credit Availability

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REP. EMANUEL CLEAVER (D-MO): Thank you, Mr. Chairman.

This is for both of you, and we've got to go, and I wanted to talk about situational conservatism, but we don't have time, Dr. Feldstein.

I'm always -- I mean, it's always amusing that people are opposed to government involvement until they want government involvement. But that's not what I'm going to talk about, because I don't have time.

But the question I want to ask, do either of you find that there is something wrong with the fact that the banks are able to borrow cheap money from the government, the loan rate -- the lending rate between banks is still unstable, and at the same time the consumers' borrowing costs seem to be rising?

Is there something -- does that bother you, trouble you, at all? Particularly when you consider the fact that we're putting money into these lending institutions?

MR. BLINDER: It does. I think that's part of the essence of the problem. The risk-free, or virtually risk-free short-term interest rates are extremely low. The federal funds rate, as you know, is 1 percent and in fact is trading at a quarter of a percent. The LIBOR has come way down, although it's not very low by a historic standard.

The essence of getting out of this broader financial problem is to get the risk spreads -- that intervene between the risk-free rates and the rates that actual, real borrowers have to pay -- down. That's in some sense the overall uber-goal of the whole thing, the whole effort.

The specific issue that does bother me, you started to allude to it in your question, Congressman, is the low rate that the taxpayer is receiving on the preferred stock that it's injecting into banks. It's a bargain rate.

REP. CLEAVER: Dr. Feldstein?

MR. FELDSTEIN: I think what Alan said is essentially correct. The fact that mortgage rates have not come down at all, even though the federal funds rate has come down to 1 percent, tells you how dysfunctional the credit markets are and how wide these risk spreads are.

And until we get the financial institutions to a point where they're willing to buy long-term assets and take those kinds of risks, we're going to see this situation in which interest rates facing consumers are very high, despite the action by the Federal Reserve in bringing down the short-term rates.

REP. CLEAVER: Thank you. I wish we had some more time. Thank you very much. Appreciate it.

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