Economist: Bailout will put U.S. on track

by Signe Brewster

Friday, October 10, 2008 00:00

The CEO and president of the Federal Reserve Bank of Boston said Thursday he believes the economic bailout plan recently passed by the federal government will provide the tools necessary to get the American economy back on track.

As leader of one of the 12 regional banks acting as fiscal agents for the U.S. Treasury, Eric Rosengren holds an important role in the economy, as he directly partakes in creating fiscal policy.

The recent $700 billion bailout bill passed by the U.S. Congress relies heavily on leadership from the Federal Reserve, making this an especially critical time in history for the institution, he said.

During the lecture, Rosengren focused on liquidity risk — the risk when investments cannot be bought or sold quickly enough to prevent a loss — and their role in the recent financial turmoil.

He said the loss of liquidity affects people’s ability to obtain loans.

“This unwillingness to take credit risks … could constrain credit-worthy borrowers from undertaking worthwhile projects and thus have implications for economic growth,” Rosengren said.

He added recent economic conditions have disrupted the availability of commercial paper, which is used by financial institutions to offset their occasional daily losses, as banks and other companies decide to hold onto their money instead of subjecting themselves to the increased risk of lending.

Rosengren said he hopes the recent actions taken to make financial resources available to floundering institutions would solve the current problem.

“Well-functioning credit markets are essential for restoring economic health,” Rosengren said. “Measures taken by the Federal Reserve hopefully will restore confidence in credit markets and allow the financial system to efficiently, once again, link borrowers and lenders in a way that promotes economic growth.”

Some University of Wisconsin students responded positively to Rosengren’s lecture, and many commented on the turnout.

“It’s very indicative of the current financial situation,” UW junior Cory Hatton said. “I can understand why so many people showed up. It is a very important issue.”

UW junior Orrawee Rattanapian said Rosengren’s speech was very timely, but also expressed disappointment toward his inability to go more into detail about the current actions of the Federal Reserve.

“A lot of what he talked about related directly to what I have been researching since May,” Rattanapian said. “As president of the Fed in Boston, there were definitely some things he could not talk about, though, that I wanted to know.”