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$700 billion bailout: How crucial is it to U.S.?
The Associated Press
Senate Minority Leader Mitch McConnell, R-Ky. (right) and Sen. Judd Gregg, R-N.H. (left) speak about the financial market turmoil during a news conference on Capitol Hill in Washington on Friday.
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Published: September 27, 2008
Ask economists about conditions in Western North Carolina and they talk about job losses.
Ask them about the necessity for a $700 billion bailout of the nation's financial system and they do the same.
John Connaughton offered a succinct reply when asked if the bailout is crucial.
"Want to work next week?" asked the professor of economics at the University of North Carolina at Charlotte and author of the quarterly UNC Charlotte Economic Forecast.
"Really, it's that simple."
The Bush administration is seeking approval from Congress for $700 billion to purchase home and commercial mortgages that are worth less than their face value from U.S. banks and other financial institutions, as well as foreign banks with American operations.
The move was prompted by steep drops in share prices of banks after recent Wall Street turmoil, including the collapse of investment bank Lehman Brothers.
The Bush administration hopes the rescue plan will help prop up the economy by removing billions of dollars in risky mortgage-related assets from financial firms' balance sheets.
Supporters hope the move will prevent other banks from failing, ease the current credit crisis and restore confidence in the financial system.
Detractors point out that the bailout could cost each American taxpayer $5,354. They worry that taxes will be raised to pay for the rescue. And many are angered at the idea of bailing out Wall Street bankers who created the distressed bonds behind the crisis.
People on both sides of the issue are anxious that a precedent is being set and that other distressed industries are sure to step up and ask for help.
Details of the plan are being worked out in Washington, and a vote by both houses of Congress is expected within days.
Clear danger
Connaughton and other North Carolina economists said the bailout is going to be costly, but not doing something will ultimately cost taxpayers much more.
"If the financial system freezes up, businesses will cut back, companies will close and people will lose their jobs," said Michael Walden, William Neal Reynolds Distinguished Professor and extension economist in the Department of Agricultural and Resource Economics at North Carolina State University.
Todd Cherry agrees.
"The government put off the bailout for as long as possible, but finally realized the crisis was too big, too dangerous to not act," said Cherry, an economics professor at Appalachian State University and co-author of the monthly Western North Carolina Economic Index.
UNC-Charlotte's Connaughton said the rescue plan is not only crucial, it needs to be approved quickly to avoid further damage to the economy.
"We're in fourth-down territory," Connaughton said.
"The two-minute warning has been given and we've got no timeouts left."
True costs
ASU's Cherry said the cost to American taxpayers may not be as cut and dry as the $700 billion price tag being cited.
He noted that the plan calls for the distressed bonds bought with taxpayers' money to be put into a federally-backed fund controlled by the Treasury. The hope is that once the market recovers, the fund will sell the bonds back into the market, recouping some of the $700 billion.
"Plus, the majority of taxpayers are going to benefit from a stabilized market," Cherry said.
Moral hazard
Economists said that beyond concerns about the estimated cost of the bailout and possible tax hikes down the road, many people resent the idea of bailing out those who have made poor decisions in pursuit of profits.
"In a sense, it gives incentives to people who have made bad decisions to make even more bad decisions," Cherry said.
"No one wants to create that problem, but you sometimes have to choose the lesser of two evils.
"This bailout might avoid a much bigger problem."
N.C. State's Walden said it's not a bailout of individual banks and lending institutions so much as it is a bailout of an entire financial system.
"A financial system is in essence a social system that relies on all of its parts working together," Walden said.
"A country — any country — needs a working economy to survive."
Connaughton said placing blame in these circumstances is a waste of time.
"Keeping the problem from spreading to the broader economy is much more important right now," Connaughton said.
"Some sort of justice can be worked out later."
Weak economy
Technically speaking, a recession is not declared until an economy experiences two consecutive quarters of negative growth.
Western North Carolina's economy is flat, but has not shown negative growth since the final quarter of 2007, Cherry said.
"I shy away from focusing on whether we are technically in a recession, but it is clear we're right on the edge," he said.
"Recessions are defined by measures of economic activity, and those measures do not seem to be capturing the weak job situation yet.
"To most people, jobs and income mean a lot more than economic activity numbers."
North Carolina's unemployment rate increased to 6.9 percent in August, up from 6.8 percent in July. It is the highest the rate has been since January 2002, when the rate was 7 percent.
The Hickory region's jobless rate in August was 8.4 percent, down from 8.6 percent in July.
Nationally, the week brought disappointing readings on employment, housing and demand for big-ticket manufactured goods.
The Labor Department said Wednesday that the number of people seeking unemployment benefits increased by 32,000 to a seasonally adjusted 493,000 — the highest level in seven years and well above analysts' expectations of 445,000. Hurricanes Ike and Gustav added about 50,000 new claims in Louisiana and Texas, the department said.
The Commerce Department said sales of new homes fell sharply in August to the slowest pace in 17 years. The average sales price also fell by the largest amount on record. New homes sales dropped by 11.5 percent in August to a seasonally adjusted annual sales rate of 460,000 units, the slowest sales pace since January 1991.
The department also said orders for expensive manufactured goods sank in August by the largest amount in seven months as demand for both airplanes and cars sank. Durable goods orders fell by 4.5 percent last month, far worse than the 1.6 percent decline economists expected and the biggest drop since a 4.7 percent fall in January.
Connaughton said that even with the rescue plan, the next year to 18 months are not going to be comfortable for most people.
"If the plan goes forward, the threat of losing your job will be greatly minimized," he said.
"If you're in finances, insurance or real estate, all bets are off."
The Associated Press contributed to this article.
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