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U.S. Fed Launches Operation Twist; Moody's Downgrades BofA, Citigroup

Aired September 21, 2011 - 14:00   ET


MAX FOSTER, CNN ANCHOR, QUEST MEANS BUSINESS: Operation twist. Can the Federal Reserve get the U.S. economy dancing to a different tune? That decision this hour.

No longer too big to fail. Three American banks are downgraded.

And Greece tries to show it's serious as it cuts, to keep its lenders happy.

I'm Max Foster in for Richard Quest. This is QUEST MEANS BUSINESS.

Hello to you.

Three banks downgraded. More stimulus in the pipeline. The U.S. economy is leading us on another merry dance. Moody's has downgraded Bank of America, Citigroup, and Wells Fargo saying U.S. banks are less likely to get the aid they may need from the government. Meanwhile, in (inaudible) plan to stimulate the economy, the Federal Reserve is going back in time.

Operation Twist is what we may hear from the Fed in a few minutes from now. That is all speculation at least and last seen in the 1960s, as you can see, a short-term stimulus plan that could lower interest rates even further. We expect to hear the Fed's latest plans in less than 15 minutes now. Long-term interest rates already at a record low in the United States so why would the Fed want to bring them even lower? Well, part of all of this is due to the housing market.

Ben Bernanke apparently believes that lowering rates will make mortgages more affordable for ordinary Americans. And we're already seeing that principle in effect. We learned today that the sales of existing homes rose by 7.7 percent last month. And that is more than expected. That is partly due to the cost of a 30-year mortgage sitting at a record low. But banks are still reluctant to lend. So critics wonder if pushing rates even lower really will do anything to help.

Now loosening up credit is what the Fed really wants to see. And businesses are sitting on huge piles of cash and they are not too keen to do anything with it whilst times are tough. Theoretically, lowering long- term rates even further could convince them to put their heads above the parapet. If saving (ph) cash in the long term becomes less profitable, businesses might be persuaded to invest the money into the economy instead. Most crucially they could decide to spend it on new hiring.

The problem is the scheme's also going to raise rates in the short- term. And in any case more intervention might not be the answer, according to some. Top Republicans in the U.S. Congress have told Bernanke that more stimulus would be a bad idea. Leaders like House Leader John Boehner, Majority Leader in the House Eric Cantor, say that previous measures, like quantitative easing, which was another way for the U.S. to buy up its own debt haven't worked. They say it only leads to more uncertainty and more volatility and have respectfully asked the Fed to think twice.

Now no one is hoping for a solution more than Wall Street. It has had a relatively quiet session until we go the news about those U.S. bank downgrades, just a few hours ago. We can expect even more movement once the clock strikes quarter past. Right now the Dow is off by around a third of 1 percent and we'll be checking in on that number again. Once we hear the news from the Federal Reserve meeting, everyone on Wall Street watching that.

Now, untangling this policy can feel like a game of Twister. One move could make it all go wrong. And here is actually how it works. To lower long-term interest rates the Fed would have to do the shift, so to speak. It would have to sell some of its short-term debt and put that money into long-term debt. That could push down interest rates long term and make big investments like mortgages more attractive. But there is another twist in the story. How much money will the Fed put in? Press blue. Some say, $20 billion. Others say up to $500 billion.

But there are, the remains of another question. The problem is that lowering rates further still might not be enough to twist the arms of American consumers to buy and American businesses to invest in the economy. So, stick or twist? That is the question.

Maggie Lake is live in CNN Washington, waiting the decision, with the rest of us, is considering today.

Maggie, all eyes on the Fed.

MAGGIE LAKE, CNN BUSINESS CORRESPONDENT: They certainly are, Max. And I know you are feeling a great deal of relief that they didn't actually make you do any of those dances, although I bet it came up. But you know, we find ourselves in an extraordinary situation where almost everyone expects the Fed is going to do something and then very quickly tell you it probably isn't going to matter, it is probably not going to help.

But let's get some expectations in detail from somebody who knows a lot more than you and I do. Anthony Sanders from George Mason University, former head of asset backed research at Deutsche Bank.

Anthony, thanks so much for being in today. First of all, what are expecting? Do you think the Fed is going to going to do something along the lines of what they are calling Operation Twist.

ANTHONY SANDERS, FINANCE PROFESSOR, GEORGE MASON UNIVERSITY: Well, yes, I do think they are going to do Operation Twist, which as he said, they are going to go through and sell short-term Treasuries, probably at three months up to a few years. And they are going to buy some that are at the seven to 10 year range. This is the most likely expectation.

LAKE: And I think what Wall Street is looking for and investors are looking for is whether they actually sell and then just sort of move along the maturity line. Or whether they actually don't sell and it is straight out stimulus. That is also possible.

SANDERS: Yes, they could actually have no increase in quantitative easing or large asset sale programs, purchase programs. What they could do is they are just moving it out along the yield curve, which is called increase duration, which is actually more risky for the Fed to do. And so that would require no new additional funds, but they could sell short and buy a lot more long, in the seven to 10 year sector.

LAKE: Why, when you talk to analysts do everyone seem to think that they are going to do this but it is not going to work. Why wouldn't something like this work? What is the problem? It sounds good on paper?

SANDERS: Well, the big problem is that in fact, you just discussed the housing and mortgage market. We already have mortgage rates at historic lows and they just can't jump start the mortgage market. So the big problem is that if we lower rates another 100 basis points and there is no credit availability, people can't get approved for mortgages, it is not going to do any good.

LAKE: So, interest rates are not the problem for housing?

SANDERS: It's credit supply.

LAKE: It's elsewhere. But let's talk quickly about this letter coming from the Republicans. I can't remember a time when we have seen-not only are we seeing division within the Fed but such public, political pressure on an independent central bank, does this complicate things for the Fed?

SANDERS: Actually, I don't believe Chairman Bernanke and the rest of the governors are paying much attention to that letter. So, I think-but again, the concern is if they increase uncertainty and inflation keeps going up due to additional quantitative easing, that's bad for consumers and Americans in general.

LAKE: And it doesn't matter how much they do, I mean, with a lot of stimulus everyone wants to see something big and bold. Do we have to see a big number here? Or just tweaking at the margins is OK.

SANDERS: I'm going to guess that a lot of people like to see something big and bold, but what we are going to see is something, I'm guessing, it is kind of small. It is not going to be very influential. It is a signal that we are doing something. But the less they do the better the signal is that we are in control.

LAKE: Right. So, we have-OK, you and I are going to be going through that statement with a fine-tooth comb when it comes out.

Clearly, Max, a lot riding on this. The markets are expecting something. Once again, looking for the Federal Reserve.

FOSTER: OK, Maggie, we are going to be straight back to you when we get that decision. We'll know for sure in just a short while. That Fed announcement just minutes away now. We'll bring you fill analysis and reaction to that. As well as all the rest of the day's business news, including those bank downgrades, after this short break.


FOSTER: We are continuing to keep our eye on the Federal Reserve, which is about to release the details of its recently concluded policy meeting. Those are expected any minute now.

But for now we have some other business headlines to get you up to date on; all sorts of things going on. Shares in HP are soaring more than 10 percent this session. Not because of positive sales figures or acquisitions, but because the CEO might be on his way out. Felicia Taylor can explain the situation from New York.

It is getting ruthless there in corporate America, isn't it?



Yes, the word is that possibly Meg Whitman, who is the former CEO of eBay, could be the new CEO of HP. Evidently the board is discussing this. And, you know, they have been meeting on a conference call and evidently they are going to be getting together face to face to discuss this even further.

She did join the board of directors of HP back in January. So, this is also being talked about as possibly an interim position for her. It is not a done deal yet.

But you know, Leo Apotheker was only appointed CEO 11 months ago. And ever since then he's been under significant pressure to really figure out the direction of where HP is going. And he has made, frankly, some management mishaps. Let's take a look at a few of what those have been. There have been hundreds of layoffs, literally, announced. They shut down their webOS hardware business. They are planning to possibly spin off the PC unit. They are planning to spend $10 billion, which was considered an incredibly pricy price tag for a British software company, Autonomy. They have cut its outlook a number of times and missed its numbers a couple of times as well. So, the track record for Leo Apotheker at HP hasn't exactly been a stellar one.

And then if you take a look at the stock price since he took over as CEO, it has been down about 43 percent. Yes, there is a gain today between 9 and 10 percent. But ever since he took over, take a look at that graph. I mean, it has just been deeply, deeply on the decline.

So, if Meg Whitman does step into this CEO position, she is definitely going to have some problems facing her in the months to come. But she comes with a pretty good track record. I mean, she was at eBay for 10 years. Admittedly, she didn't get the governor position in California. But that is a totally separate issue. So she has actually been heard talking about being interested in going back into the corporate arena. She has been a long-term person that was in Silicon Valley. She has a track record, though, for really being on the consumer side of businesses. And this is, obviously, a hardware company. So she may need a little help along the way.

But nevertheless the stock market clearly likes the idea of possibly having Whitman step in as the new CEO of HP.

FOSTER: Felicia, it hasn't even been confirmed yet. We are all going really on this stock market speculation, but I think the message is that the market wants him out. So they can't actually keep him now can they? It will be a disaster.


TAYLOR: Well, it doesn't look like the market wants that at all. I mean, like I said, he has had quite a few problems. And the real big discussion is, what is HP? It lost a lot of its PC business thanks to the advent of the iPad and also through the competition, which was offering lower priced items. So the real question is where does HP go from here? What is the direction of the company? The board of directors clearly is sending a message that Leo Apotheker doesn't have a clear vision. And you know, we talk about this uncertainty in the marketplace all the time, when it comes to equity prices and you know, in Washington as well. But it is the same thing as the head of a company. They need to have a clear vision of what the company is going to be. So that will be the new CEO, if it is Meg Whitman, her biggest defining moment so to speak, as to figure out what HP is going to becoming in the future.

FOSTER: Felicia, thank you. We await the announcement.

Now, Wall Street has a banking bombshell to contend with as well, as we move into the last few hours of trading. Wells Fargo, Citi, Bank of America, all downgraded by Moody's. Let's get Alison Kosik in New York to explain this one.

Was this a surprise, Alison?

ALISON KOSIK, CNN BUSINESS CORRESPONDENT: Not so much a surprise, but you know what it is the last thing the financial sector needed, Moody's downgrading its ratings of several classes of debt at Bank of America, Citigroup, Wells Fargo. The reason, Moody's says, is it says there is a lower probability that the U.S. government will step in to support banks in trouble. Financial stocks, they are mixed on the news. Citi is under some pressure. Bank of America down 2 percent. Goldman Sachs, almost 2 percent lower as well.

You know we've spoken with many traders over the past couple of months, who say the stock-Bank of America, I'm talking about-is very undervalued. But the stock price, it has actually struggled to stay above $7 a share for most of August and September. The B of A downgrade also dragging on the Dow just a little bit right now. Pushing the yield on the 10-year Treasury to another all-time low, Max.

FOSTER: And this, Alison, is because there is a feeling that Washington simply won't bailout these banks a second time around?

KOSIK: Right. Right and they are saying it may not be too big to fail, after all, these banks. So that is quite worrisome. The reason why we are seeing financial shares take a big hit right now, Max.

FOSTER: And Bank of America disputing Moody's, but I guess it would, right?

KOSIK: Of course, you know, Bank of America has really just been treading water and has been trying to keep its head above water. I mean, if you think about it, almost every day a headline comes out about Bank of America. And it is usually not a great headline. The stock is down at least 40 percent for the year. Shareholders are taking it on the chin, to say the least, Max.

FOSTER: OK, Alison, thank you very much indeed.

We are awaiting the Fed decision. We are also looking to Greece, coming up, announcing a raft of austerity package-uh, measures. Quite radical ones, some say. Unions vow to fight it. Back in a moment.


FOSTER: Greece announcing new austerity measures as it tries to satisfy the so-called troika and secure the bailout payments it needs to avoid default. The government will reduce pay for $30,00 civil servants, extend a property tax hike and cut pensions for those aged under 55. Greece finance minister addressed parliament today, a head of a trip to Washington for IMF talks this weekend.

Evangelos Venizelos says the country must take action to deal with its huge public debt and its annual deficits.


EVANGELOS VENIZELOS, GREEK FINANCE MINISTER (through translator): This is a situation that weakens the country. This is the country's problem. Because of this problem we are forced to implement a very tough and demanding program of fast fiscal adjustments. Which means sacrifices from households, sacrifices from every citizen, sacrifices from the worker, the pensioner, the entrepreneur, sacrifices from the unemployed. And the worst? Sacrifices that the younger generation will be subjected to.


FOSTER: Scenes like these, in Athens, though, last week are likely to be repeated. Greece's two largest unions have reacted against the austerity measures, calling for two days of strikes next month.

European markets closed before the Greek government's announcements, although an acceleration in budget cuts was expected. Most markets dipped into the reds, with Frankfurt's DAX down around 2.5 percent. London's FTSE 100 and the CAC 40 in Paris also saw looses today. Zurich bucked the trend though. Here is how some other European markets faired. Spain and Italy down. Portugal just managed to make it into the black today.

Some more bad news for those hoping that stocks would go higher, although, it will come as no surprise, the global economic recovery has slowed and progress is stalling. That is the worrying assessment from the International Monetary Fund, according to its financial stability report, which was out today. Risks have increased for the first time since the depth of the 2008 financial crisis and European banks are suffering. The IMF estimates that sovereign debt risk facing the banks has increased by a whopping $270 billion since the beginning of Europe's sovereign debt crisis in 2010.

Joining me now, from Washington, is financial counselor and director of the Monetary and Capital Markets Department at the IMF, Jose Vinals.

Thank you so much for joining us. Just explain to us how you manage to put these risk numbers together and what they mean. Because that is what is really dominating this report today and what people have been focusing on.

JOSE VINALS, DIRECTOR OF MONETARY & CAPITAL MARKETS, IMF: Well, what these numbers mean is how much higher is the sovereign credit risk, which has been imported by European Union banks, as a result of the tensions which have affected a number of countries in the euro area. So, this is an estimate of the potential losses to which these banks, you know, have been subjected since the beginning of the 2000, as a result of that. Now, some of these losses may have been already recognized by banks, been taken into account, but what we are measuring is the size of the shock. And the shock has been a very important one. It explains why markets are uneasy about many European Union banks.

FOSTER: So the shock, the sort of costs for the banking sector in Europe is something like $270 billion. Put that into context for us, though, with other crisis. How damaging is that compared to other crisis we have had?

VINALS: Well, I think that this is a shock that could be reversed if countries which have been under market scrutiny regarding the public finances, are able to implement macro economic and fiscal measure to improve growth and to reduce budget deficits. This is something which will immediately shrink the size of the sovereign risk, which has been imported to banks. So this is why we think that medium-term fiscal consolidation is absolutely of the essence, together with growth enhancing structural reforms.

FOSTER: That is the problem, though, isn't it? Because yesterday we had your colleague the chief economist at the IMF on, saying he's concern that there is political deadlock and that means it is not actually going to happen in the way that it will hope it will unfold. And that is the problem.

VINALS: Well, what we are trying to call attention is that the problem is significant in terms of the need to address sovereign risk by healing the public finances. And that it is fundamental to have convincing fiscal consolidation strategies. This is one thing that needs to be done. But because markets may not be convinced instantly, overnight, then you will be well advised to make sure that all banks get adequate capital buffers to withstand potential risks.

FOSTER: Which is another cost to them, of course. We got the Federal Reserve decision looming, or the announcement. Sovereign debt in the U.S. context, how worried are you about that?

VINALS: Well, we think that the sovereign debt issue is not just important in Europe, but also very important as well, in the United States. And we think that it is paramount that there is bi-partisan agreement on how to bring down the deficit and the debt level over time, so that one can regain the stability of U.S. government debt. This is something which is fundamental not only for the U.S. economy but also for the world. Because if an accident were to happen, if a broader or deeper downgrade were to happen in the future, this will have very adverse global economic and financial consequences.

FOSTER: OK, thank you very much indeed. We got some breaking news for you.

The Federal Reserve has just come out with its statement. It is holding interest rates, on hold. It is keeping its interest rates on hold; between 0.25 and virtually zero, of course. We are going to speak to Maggie Lake, now, because she is the expert on this story today.

You haven't had much time to digest it, though, Maggie. What do you make of it?

LAKE: Yes, that is right, Max. We are still waiting to get a good look at the statement to get some of the details. But what we know from the headlines, that seem to be crossing, is that there is some sort of Operation Twist underway; $400 billion was the number that Wall Street was roughly look for, buying 6 to 30-year bond by the end of June 2012. That is around the right ballpark, although if it is to 30 it is a little bit longer than we thought.

I'm going to bring Anthony Sanders again.

Anthony, you and I don't have very much detail on this at all. But it looks like maybe what the market was expecting?

SANDERS: Yes, it is approximately what the market was expecting. I think going out 30 was a little bit more than the market was expecting. But an odd rub came in, is that 30-year rates have actually dropped to the lowest point in two years. So, something has been happening in capital markets already. I'm not sure how much lower they can go.

LAKE: Yes, one of the things I know we are going to be looking for is whether they are selling on the short term to extend out, or just if this is additional money, which would be a version of QE3. Is enough of a sort of stimulus to upset the critics, who want the Fed to get out of the way? Is this going to interfere? I know there were op-eds in the paper today saying, listen, you know the intention is good, clearly the Fed feels it must be doing something. But this could actually hurt the country. At the same time the Treasury is looking to take advantage of low rates and get the government debt extended out and sort of locked in. The Fed is in there, too. And these two things are contrary. I mean, is this actually- could it hurt more than it helps? Could the Republicans be right?

SANDERS: Well, I think what is going to happen now is we are going to find out that even if they succeed in pushing rates down, and I still think they are going to target more heavily to 7 to 10s. They are going to do some in the 30s, but I'll believe a lot of that when I see it. But what- this will accomplish very little I think. It is not going to really improve the mortgage market. It is not going to help the housing market. And corporations are already able to borrow money. Because as someone pointed out they are sitting on $2 trillion of cash.

LAKE: And what wouldn't you given the economic outlook globally that we are looking for when fear is back and risk. One thing, another headline coming out is that again, three members dissenting. This level of disagreement within the Fed, I mean, I guess it shouldn't be expected given that we are in uncharted territory, but is it problematic? I mean, is there a real divide in the Fed that that is sort of hampering their ability to affect monetary policy?

SANDERS: Oh, there is a big divide in the Fed. Several of the governors actually believe that this is not helpful. In fact, we are in a sense distorting markets. And in fact, it may be inflationary in the fact that they start pushing up inflation up to over 5 percent. It could be very damaging to the economy. And there are some people like it, but as I pointed out to you earlier, that even if you have inflation to help underwater households get above water, A, I don't think that will work. But, B, it just makes it more expensive for anyone else trying to get into the housing.

LAKE: Right.

SANDERS: So it is just taking money from one pocket and putting in another. It is better not to fool with inflation.

LAKE: OK, Anthony we are going to take a look at that statement.

And, Max, clearly it shows what a difficult spot the Federal Reserve is in. They don't have an awful lot left, room to maneuver. It seems like they are doing what they can. But a lot of people saying, ultimately, you know, to sort of address these very serious problems you have got to take it back to the fiscal side, it has got to be back in the hands of Congress and the administration, Max.

FOSTER: Yes, and the Republicans will have some words to say about this as well. We'll let you digest it more and come back to us, Maggie, if you find something else interesting in there.

Now, up next we hear from Lord Lamont. He has been raising some concerns about the euro and saying his warnings were right about it all those years ago. The Fed isn't the only one in the hot seat today. The Bank of England is also trying to come up with more ways to boost the faltering economy. We are going to be back in just a moment.


FOSTER: Let's check the news headlines for you this hour.

Barack Obama says no shortcuts for the formation of a new Palestinian state. He spoke at the U.N. General Assembly today, telling delegates that statehood should happen through direct negotiations with Israel.

Palestinian officials say President Mahmoud Abbas plans to submit a request for U.N. membership on Friday, although he does not expect an immediate vote.

"Today can only be described as the best day of our lives," jubilant words from the families of the three Americans known as the hikers who were imprisoned and Iran. The final two, Shane Bauer and Josh Fattal, were released today on a million dollars bail after being held for two years. The other, Sarah Shourd, was freed last year on medical grounds.

The clock is ticking down for U.S. death row inmate Troy Davis. He's set to be executed by lethal injection in the state of Georgia in just a few hours time. His supporters and lawyers are vowing to keep fighting to stop it. They've called both the witness testimony and physical evidence into question.

The U.S. Fed announced a new plan to jump-start the U.S. economy. The central bank plans to buy $400 billion in longer-term bonds through next summer and sell an equal amount of short-term debt, in so-called Operation Twist. The idea is to push down long-term interest rates. The announcement comes as the end of the Fed's two day meeting comes to an end.

Well, the Fed isn't the only one in the hot seat. The Bank of England is also trying to come up with more ways to boost the faltering recovery. Here's the latest from the minutes of its September 8th policy meeting.

They were made public, though, just today. The Bank of England may be gearing up to inject more money into the limping economy. We've been hearing about this quantitative easing program for a while now. And it was halted in December 2009, after the UK's central bank pumped money into the -- the crunch hammered economy.

Now, the U.K. is also coming to terms with -- coming to grips with record government borrowing. Public sector net borrowing, a mouthful often shortened to PSNB rose by almost $25 billion. That is higher than expected. And the U.K. government debt now stands at more than 61 percent of annual economic output. It's a big political and economic debate here.

Now, earlier on Wednesday, the British pound touched an eight year low against the dollar. The U.K. currency was reacting to those hints from the Bank of England that it may resume quantitative easing.

Now, Julian Karra -- Callow is the chief European economist for Barclays Capital. He joins me in the studios now.

Thank you so much for joining us.

We -- we thought we'd seen the end of quantitative easing, but is it a case that basically it's the only solution right now to prevent an economic catastrophe?

JULIAN CALLOW, CHIEF EUROPEAN ECONOMIST, BARCLAYS CAPITAL: It might well be that, yes. We -- we'll have to see. But clearly, conditions have deteriorated very significantly in Europe, as the Eurozone debt crisis and the United States growth is faltering here. And central banks have clearly got interest rates at very low levels.

So what more can they do?

If they feel they're concerned that unemployment is going to be rising and they want to get more stimulus into the economy, well, all they can do is quantitative easing. And -- and that seems to be the -- the route, clearly, that they're looking at. But increasing the risk is, of course, again to be going down that route.


I want to ask you about the twists, because the Bank of England's system is a more traditional form of QE, isn't it?


FOSTER: The twist is something different, because it's not new money that we're creating here.


FOSTER: It's hopening -- hopefully loosening up the system. Explain how it will help.

CALLOW: I think you've got to bear in mind that for the Fed, the most important thing, really, is what's happening in the U.S. housing market.

That is the key transmission mechanism (INAUDIBLE)...

FOSTER: So get (INAUDIBLE) now...

CALLOW: -- for the Fed's interest rates.

Yes. And, of course, the housing market has been very weak and the mortgage market has been very frozen in the United States.

So the idea is you can get the Treasury interest rates, the long-term interest rates, the bond yields, down to very low levels then mortgage...

FOSTER: To make them more attractive?

CALLOW: Well, that...

FOSTER: Is that what they want to do?

CALLOW: -- well -- well, partly. But, also, it's going to bring down mortgage borrowing costs. And that way, the Fed can do a bit more to help the U.S. housing market to stabilize. It's got to get the housing market back and functioning in order that it can start getting control again over the levers of the economy.

FOSTER: Technically, that could work. But the banks are apprehensive about lending, as well, aren't they?

There's some psychology here.


FOSTER: Are they ready to start lending, because they're worried about...

CALLOW: Well...

FOSTER: -- not being paid back?

CALLOW: That's...

FOSTER: -- (INAUDIBLE) step in this time?

CALLOW: That's clearly an issue. But it's one, you know, the banks would say that the corporate sector is hoarding large cash surpluses here in the United States, in the UK. The corporate sector is actually where the nervousness is. It doesn't really want to go out and -- and spend to invest, either in America or in Europe, in the current environment. And -- and so the banks could say, quite easily, I think, look, it's up to governments to -- to build confidence here.

But confidence is very frayed because we have had a lot of economic problems. And, of course, governments themselves have very large deficits in the United States, in the U.K. and in parts of Europe.

FOSTER: Julian, thank you very much, indeed, for your analysis on this.

CALLOW: Thank you.

FOSTER: Maggie has been poring over the statement, because this is interesting stuff -- Maggie, isn't it?

It's very technical, but it is profound.


And I -- I just want to emphasize something that -- that you mentioned in talking with Julian there, and that is that they are selling the same amount as they are buying on the long end. That's important. They're just shifting the money around to try to have that impact, as opposed to arriving with a new truckload of money and dumping it in.

So although that may help sort of ease some of those critics who were very against more stimulus, QE3, not sure that it's going to make a difference with the markets. And, in fact, we are seeing the stock market start to sell of now. Clearly, many, many worries out there for them to focus on and headlines coming out of the situation of Europe, the downgrade of the banks.

But people were saying if the Fed didn't come up something unexpected, that you may see disappointment start to filter in. And, indeed, that may be what's driving things.

But again, no new additional boatload of stimulus. They're just moving the money around to the longer end of the curve. I just wanted to make sure we were clear on that.

FOSTER: OK, Maggie.

Thank you very much, indeed, for that.

Now, that's the American story.

We've got a European one, as well, in global economics.

And a former British finance minister has described the creation of the euro as an act of folly.

Lord Norman Lamont was Britain's chief negotiator for the 1992 master treaty, which led to the creation of the euro, although Britain didn't adopt the single currency.

Richard asked Lord Lamont what can be done to pull the Eurozone out of its current mire.


NORMAN LAMONT, FORMER BRITISH FINANCE MINISTER: I think there are two alternatives. They are, bluntly put, cough up or break up. I think they have a choice between bailing out Greece and giving a visible and clear sign to the markets that enough money is there to protect other countries that might suffer contagion from Greece.

They either do that or, I think, they will lose the game and they will find that default, which may be going to happen anyway, on the part of Greece, will happen and they will have a sort of forced breakup.

QUEST: If I read the storms from all the leaders, they say this. The market doesn't seem to believe them. But -- so what practical efforts -- I mean if you look at what happened in Poland at the weekend and last week, they made all the right noises -- the euro is our currency, we will stand by the euro, we will support the euro.

So where -- where is the mismatch here?

LAMONT: Well, I don't think the market is convinced that enough resources have yet been put in place to safeguard the euro. And furthermore, the permanent mechanism or the semi-permanent mechanism that is being put in place, the European Financial Stability Facility -- it's difficult to get that out -- has not yet been ratified by all the countries. And it's going to be ratified by October. Slovakia, for example, some of them are saying they won't ratify it until December.

That is a very serious -- I mean I think one of the great dangers in this situation is that there are so many different people and entities and countries and government bodies involved that there can be a miscalculation at any point and the thing is forced over the edge. That is the real risk.

You see, when the euro was set up, a lot of people said, well, it's very good, you have a currency without a government. That's a plus point, not -- a plus point, not a minus point. But actually, it's turned out to be a minus point, because no one is in charge.

QUEST: Did you feel, at the time of (INAUDIBLE), immediately after, this was never going to work?

LAMONT: I have always said it would eventually break up, though my own view has always been that it would have been rather longer than the crisis that has started at -- on a rather longer time scale than we've so far seen.

QUEST: If you're right, then this thing is destined to continue either, best case scenario, fudge and trudge, worst case scenario, bankruptcy, default and collapse?

LAMONT: Yes, well, that's exactly right. And what I think is most likely to happen is the former. I think we will see sticking plaster after sticking plaster put on top of it so that the blood underneath is concealed, but is still there.

QUEST: How does that make you feel?

LAMONT: Well, I think it's a desperate situation. But I -- I don't want to overstate it, but, frankly, I think the euro was an act of folly.

QUEST: Continue. Tell me more.

LAMONT: Well, I think it was never going to -- to work without having the complete fiscal interrogation of Europe, a European treasury, a European finance minister and a common tax system throughout Europe. And yet you can't really have that.

If you put that to the voters of Holland or Finland today, they would say but that's incompatible with our democracy. We vote as to whether we want tax cuts or more spending, the sort of debate we have in England all the time.

If you take that away from people, you're really taking their democracy away. So that won't be agreed, because the politicians know that can't work.

QUEST: You saw through one of Britain's worst euro-ERM crises.

What advice would you give to those who are dealing with it now?

You had to take some pretty firm decisions eventually, ratcheting up interest rates to 17 percent, then leaving the ERM.

What advice would you give today?

LAMONT: Well, I would say face up to it and I think they have no alternative, really, but to cough up, to devote more resources to it. And they've got to sell that to German public opinion.


FOSTER: Lord Lamont speaking to Richard.

Now, you are with QUEST MEANS BUSINESS.

Just ahead, Russia definitely has Georgia on its mind. Tbilisi now has a certain power over Moscow. I ask Georgia's deputy prime minister how that might play out. His answer is next.


FOSTER: The ball is in Russia's court -- that's what Georgia's deputy prime minister told me this week when I asked him about the Russian chances of joining the World Trade Organization. Moscow wants in badly, but Georgia's veto power can stop Russia's WTO bid cold.

You may recall that relations soured three years ago after a five day war between Georgia and Russia left thousands of Russian troops in disputed South Ossetia and Abkhazia.

For his part, Giorgi Baramidze told me Georgia wants to normalize relations with Moscow and Tbilisi is not linking its veto power to progress over the disputed territories.

So where do both sides stand right now?

Well, here's what the deputy prime minister had to say about that.


GIORGI BARAMIDZE, GEORGIAN DEPUTY PRIME MINISTER: We do want to put anyone against Russia or to artificially irritate Russia. But it's important to recognize the objective facts and then therefore, we very much appreciate a recent resolution by the senate, which was adopted unanimously, recognizing the fact of the occupation, illegal occupation by the Russian Federation of Georgia's 20 percent of territories, calling Russia to fulfill its obligations according to so-called cease-fire accord brokered by the then European presidency, president of France, President Sarkozy of France.

And certainly, we would like to have some kind of dynamic in this process to stimulate Russia to start the occupation, start withdrawing their forces, continue dialogue with them and normalize our relationship.

FOSTER: But one thing you could do is use your veto to block Russia's entry to the World Trade Organization. And Russia very keen on joining that organization.

Are you going to use that veto?

BARAMIDZE: No, it's not a political issue. And we are not going to link this with Georgia's territories. The occupation, we have interests, as well as the United States, the European Union and other countries, to have Russia in WTO. But Russia should meet at least the minimum requirements of the WTO rules and procedures and ensure that trade between Georgia and Russia, which goes on alongside the border, is transparent. We are...

FOSTER: That's right but you're not agreeing to it yet, are you?

BARAMIDZE: -- of course...

FOSTER: You're not agreeing to their acceptance to the WTO yet.

So what is it that you're objecting to...

BARAMIDZE: Well, we are...

FOSTER: -- and at what point will you approve their entry, then?

BARAMIDZE: Yes, actually, we are negotiating by the request of the -- of the Russia. The ideal case would be to have Georgian custom officers on the border. But it seems to us it's unacceptable for Russia at this stage. So we are ready to compromise and we offer some kind of international observation mission, for instance, the European Union can do the same as it's done in Moldova and other Eastern European countries. So we try to...

FOSTER: How are the negotiations going?

How close are you to some sort of agreement with Russia on two membership?

BARAMIDZE: Well, we have presented our proposals. The Swiss government is participating in these negotiations. And we basically have accepted the proposals, also, from the Swiss government, with some moderations.

So now a kind of ball, you know, on the Russians' court. So we will see how they will play out this.

FOSTER: But they're not going to get entry this year, are they?

So it's probably -- what -- well, when would you say their...


FOSTER: -- entry will be?

BARAMIDZE: As I've said, it's in our interests, as well. So as -- as soon as Russians will apply the norms and principles of WTO, certainly, there will be no obstacle for them.


FOSTER: The deputy prime minister of Georgia speaking to me.

Now the last full day of summer on Thursday. And parts of Europe will have brilliant weather to enjoy, I'm told by Pedram -- give me more, Pedram, more information.


FOSTER: -- more information.

JAVAHERI: -- you know what?

You're going to deserve this because we know what's been happening across London the past couple of weeks and couple of months in general. The summer season one of the coolest since the early '90s across parts of Northwestern Europe.

And do you know what?

We do have a disturbance well to the north right now, affecting portions of Orkney Islands out there around areas, even around Belfast, work your way toward Dublin, you're going to have some gusty winds, some rain showers as this feature works its way toward Scandinavia. And then beyond that, we're talking mild conditions for at least a couple of days.

But quickly, one disturbance that would have over the Aegean Sea right now, and passing Western Turkey, in and around Istanbul, they're going to see a few strong thunderstorms over the next 24 hours leading into, say, Thursday morning. Some large hail possible with this. Some excessive rainfall possible over the Greek Islands.

But besides that, big blue. That's our friend. A high pressure system in place. What it's going to do is deflect the storm track, send it a little further to the north and also cause the air to warm up a little bit for you.

So we'll call it mostly sunny at times here and pleasant, conditions not only for Thursday, but also for Friday, as we transition from the fall season in the Northern Hemisphere. And mild temperatures left in place.

But if you've got travel plans across this part of the world, moderate delays at times around, say, Copenhagen. Some strong winds possible there on Thursday afternoon and into Thursday evening.

And Athens, you saw a few showers but it shouldn't really impact your travel out there too much.

So overall, a very nice weather pattern.

Well, the same can't be said for our friends across Tokyo. Take a look at this. This is what's left of what is now Tropical Storm Roke out there across portions of Japan. The winds right now sustained at about 111 kilometers per hour. But look at the storm system fall apart. Twelve hours ago, it was impacting Tokyo. Quickly screaming across the northern portions of Hokkaido right now, bringing in some heavy rainfall in that part of the world. Sendai, we know, has been hit fairly hard with heavy rainfall. But right now, the rainfall totals take the -- the winds take the speeds up to about 81 kilometers per hour.

And we know rainfall totals also have been fairly extensive across this part of the world. But the track has taken the storm offshore. And by the time Thursday evening local time comes around Japan, the Kuril Islands are going to get some of the stronger winds and rain associated with this. And then the storm falls apart -- Max.

So good news for Japan and also for Europe the next couple of days.

FOSTER: Great.

Thanks, Pedram.

JAVAHERI: You bet.

FOSTER: Now, cracking the feel good factor at work -- meet a man who says he can't wait for Monday morning.



FOSTER: At this point in the work week, some of us may be looking ahead to the weekend with relish. But in tonight's edition of World At Work, we're hanging out with a man who loves Mondays. That's because he's found his own Eden in one of London's World Heritage Sites.


TONY KIRKHAM, HEAD OF ARBORETUM, ROYAL BOTANIC GARDENS: I can go back to when I was 10 years old. And it was a science lesson by my primary school teacher. And she was telling us all about the horse chestnut tree. And I was suddenly inspired by this tree when Miss. Beasley brought a lot of twigs in with large buds. And she said when you come into school on Monday, these will be in full leaf.

She was right. The leaves were out. And from that moment, captivated and realized there was more to life in trees.

So one of the beauties of this job is -- is trying to -- to grow a tree that is almost impossible to grow. And this is one in particular. And the trick of it is to get the seeds very, very hot in compost. And that spurred them on to -- to germinate. So it's probably like the seeds going into the intestines of an animal. So, again, copying nature.

There's a fantastic feel-good factor that you've -- that you've cracked it and -- and you're managing to grow this.

There are 14,000 trees at Kew, over 3,000 different species. And what you can see out there are sweet chestnuts, oaks, hornbeams, beech. You know, there's a huge diversity of plants at Kew. You know, trees are living, they're dynamic things. Unfortunately, they die. But then that makes room for the next planting. And -- and my job is ensuring that, you know, 250 years of tree planting out here from my predecessors continues for the next 250 years. And I'm just a snippet in the life of the arboretum at Kew.

One of the inspiring things about these trees is that, you know, they're -- they're designed themselves to cope with the -- the problems that they have where they come from. And one of the big problems are -- are fires in California. So they've, over the years, over, you know, thousands -- tens of thousands of years, it's developed a soft bark. And it's fire retardant. So when the fires come through, it doesn't burn.

And they've just got all these neat adaptations, fascinatingly. And the more you learn about them, the more you want to learn and the more you want to understand.

I love my job now. I enjoy coming into work. You know, I can't wait for Monday. Every day is different. You never know what you're going to experience that day.

For me, when I go out into the world, into China, into Japan, Taiwan, North America, into a woodland in Surrey, I'm inspired.


FOSTER: What a great environment to work in.

You are watching QUEST MEANS BUSINESS.

Just ahead, we'll get a check of the markets for you in the U.S. and around the world.

What was the reaction to that Fed announcement?


FOSTER: A recap on our top story this hour.

The U.S. Federal Reserve has just announced plans for more economic stimulus. In the past hour, it's pledged to buy up to $400 billion in long-term treasuries between now and June next year. It will sell a corresponding amount of short-term debt, so it's not new money, just shifted around. That's in the hope of lowering long-term interest rates.

The Fed also announced it's keeping its benchmark rates on hold close to zero.

The reaction from Wall Street is this -- pretty negative so far, down nearly 1 percent. Since the announcement, the Dow has fallen a bit further than that initial fall. And it was off by more than 1 percent at one point. Investors are also digesting the news that Moody's has downgraded three American banks, Wells Fargo, Citi and Bank of America all had their ratings cut due to fears that they may get financial support from the U.S. government if it's required or may not get that support as it did in the past. They are no longer too big to fail, Moody's thinks.

Now, European stocks had a mainly down day. Only the Zurich SMI managed to escape losses of around 1.5 percent or worse. That more or less erased the gains made on Tuesday.

Greece's finance ministers continues his conference calls with the IMF, ECB and European Council. We're getting more details on that all the time. But some radical measures, it seems, in terms of austerity in Greece tonight.


I'm Max Foster.

"PIERS MORGAN TONIGHT" is just ahead.

We'll check the headlines first for you, though.