NEW YORK, Sept. 30, 2008
With Or Without Bailout, Tough Times Ahead
Recession Likely; Higher Unemployment, More Bank Failures Possible, Financial Experts Warn
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The tanking stock market and falling home values - the single-biggest assets for most Americans - have taken big bites out of people's wealth and their retirement accounts even as high energy and food prices are shrinking paychecks. (AP Photo/Mark Lennihan)
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Timeline Credit Crunch Feeling the squeeze? Here's a look at actions and statements from key players in Washington.
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Interactive Eye On The Economy In-depth features on U.S. markets, taxes, employment and the Federal Reserve.
The fallout from the vote may well dig deep into the economy, several financial experts say.
Even if the bailout were enacted by Congress and actually worked, many predicted the economy will probably shrink in the final quarter of this year and in the first quarter of next year, meeting the classic definition of a recession.
The House's stunning defeat of a $700 billion package urgently championed by President George W. Bush, sent shock waves through Capitol Hill, the trading floors on Wall Street and the Oval Office on Monday.
Mr. Bush warned on Tuesday that the economic damage will be "painful and lasting" if Congress doesn't revive the package.
With the House not scheduled to meet again until Thursday, congressional leaders and administration officials promptly sought to assess what types of changes could win over enough votes to guarantee success. As lawmakers try to figure out what to do, Americans are left to ponder what lies ahead.
"An economic 9/11," warned Terry Connelly, dean of Golden Gate University's Ageno School of Business, of the potential fallout. As the package went down, panicked investors caused the Dow Jones industrials to nosedive nearly 780 points in their largest one-day point drop ever. Markets across Asia fell sharply Tuesday in the wake of the Wall Street downdraft.
Lawmakers defeated the legislation by a 228-205 vote, although Democratic and Republicans leaders and Treasury Secretary Henry Paulson all pledged to keep working for a package acceptable to all sides.
Vowed Mr. Bush: "This is not the end of the legislative process."
In the meantime, the economic wreckage that the administration and Congress have warned about - rising unemployment, shrinking nest eggs and prolonged recession - might not happen immediately, but that doesn't mean it won't happen at all.
"This is like the advice you get from the doctor who says you should quit smoking," said Robert Brusca, chief economist at Fact and Opinion Economics in New York. "You know he's right. But if you don't, you're not going to die tomorrow and you're not going to die next week. But at some time, it's probably going to get you."
For now, Treasury was expected to work with other government agencies, including the Federal Reserve and the Federal Deposit Insurance Corp., to deal with problems on a case-by-case basis.
"Our tool kit is substantial but insufficient" without a bailout, Paulson warned.
There are some steps the Federal Reserve can take to cushion damage from the worst credit crisis since the Great Depression.
The Fed, which has been providing billions in short-term loans to help banks overcome credit stresses, could keep expanding those loans in an effort to spur financial institutions to lend more freely again. And, it could keep working with other central banks to inject billions into troubled financial markets overseas.
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economist, ClearView Economics
Also, the Fed could make it easier for banks and investment firms to draw emergency loans from the central bank by expanding the type of collateral they pledge to back those loans.Undoubtedly, both businesses and consumers will run for cover. They will clam up. The snowball hitting the economy will pick up speed and gather mass.
Ken Maylandeconomist, ClearView Economics
And, if the credit crisis were to turn even worse, the Fed also has the power in extreme circumstances to expand emergency lending to other types of companies and even to individuals if they are unable to secure adequate credit from other banking institutions.
The Fed also could do an about-face and start cutting its key interest rate again. The Fed in June halted an aggressive rate-cutting campaign and has kept its key rate since at 2 percent.
While some Fed officials doubt that another rate reduction would do much to boost confidence and persuade banks to begin lending again, Brian Bethune, economist at Global Insight, insists a deep cut would pack a powerful punch. It would lower the prime lending rate, now at 5 percent, that serves as a benchmark for credit card rates and many other types of loans.
Peter Morici, an economics professor at the University of Maryland, suggests Americans should be conservative with their money and focus on paying down debts.
However, Morici told CBS' The Early Show that without some sort of government intervention, "everyone's personal finances are going to be worse. This has to be solved."
If Congress doesn't act, analysts, who were scrambling to downgrade their economic forecasts, believe the U.S. economy could shrink even further.
The unemployment rate - now at a five-year high of 6.1 percent - is expected to hit 7 or 7.5 percent by late 2009, which would be the highest since after the 1990-91 recession. Some economists say the jobless rate could rise even more.
"Undoubtedly, both businesses and consumers will run for cover. They will clam up," said economist Ken Mayland, president of ClearView Economics. "The snowball hitting the economy will pick up speed and gather mass."
More banks could fail, too. In the second quarter that ended in June, the Federal Deposit Insurance Corp. estimated 117 banks and thrifts were in trouble, the most since 2003. The threat of more banks failing in the U.S. and abroad forced the government to act swiftly.
The tanking stock market and falling home values - the single-biggest assets for most Americans - have taken big bites out of people's wealth and their retirement accounts even as high energy and food prices are shrinking paychecks. Consumers are major shapers of the U.S. economy. If they retrench, the country will go into a tailspin.
The bailout plan was intended to revive jittery and fragile banks on Wall Street and Main Street by buying billions upon billions of their worst mortgage-related assets so that lending, the oxygen of the American economy, would flow freely again.
"People are going to go home and look at their 401(k)'s and not be very happy, and these are not just people from New York, but Iowa and everywhere else. This bill is meant for everyone - not just Wall Street but Main Street," said longtime New York Stock Exchange floor trader Theodore Weisberg.
For some perspective on the value of $700 billion, consider this:
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Add a Comment See all 59 Comments
- I was for Obama/Biden but after all of the reports I''ve read about Obama''s homosexuality, crack cocain use, his involvment in this subprime fraud, and all the other lies I have decided to vote for McCain/Palin. Thank you for posting this information, I emailed theses political crooks and told them what a disgrace they are to America.
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- What part of this financial crisis do you people not understand? As it stands right now, credit is frozen.
For you, for small business, for payrolls, for inventory, for loans. No money is moving. Banks are not lending...to each other, to business, or to you.
Admittedly, it is a deplorable situation, and there is enouth time for finger pointing later. The banks need funding to unfreeze credit, so that the economy can start moving again. And it needs to be done quickly, to minimize damage, to prevent increasing unemployment, to restore value to people''s retirement funds, to assure payrolls, and to prevent the present situation escalating. We do not live in a pure democracy, which so easily descends into mob rule. This is a republic, with democratically elected representatives who serve the public good. Right now we might not agree with what our elected officials decide to do, but I believe that each one of them will
put the best interests of the country first. - Reply to this comment
- No Wall Street = No wars = No people die on both sides.
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Posted by niceface69
You need to get an education. Your math is bad.
You need to turn-off the TV and CD player. John Lennon was tripping on LSD when he wrote "Imagine." Jesus Christ was hanged on the cross for attempting to save man from himself.
Until heaven delivers you, your math just will not work in the Planet of the Apes. - Reply to this comment
- IT%u2019S TIME FOR EVERY VOTER TO CONTACT THEIR SENATOR AND REPRSENTATIVE AND GIVE THEM THIS SIMPLE AND DIRECT MESSAGE:
%u201CYOU WANT TO VOTE FOR THIS BAILOUT?%u201D
%u201CGO AHEAD. MAKE. MY. DAY.%u201D
%u201CSEE YOU AT THE POLLS.%u201D - Reply to this comment
- And then the Government of Pigs said "All animals are equal, but some are more equal than others, so give us all your money, because we lost ours, or spent it somewheres, we''re not really sure. But we need it right now, so hurry up. Don''t ask why & don''t make us wait."
- Reply to this comment
- niceface 69 ---- you need to go "get a life."
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- If fact, if you have some extra funds available, consider buying some of the stronger financial stocks. This can be an opportunity for patient investors, but a disaster if you panic.
Posted by khhammerle at 12:53 PM : Oct 01, 2008
I absolutely agree with everything you have said in your post. The bottom line is bad credit caused all this mess. It either needs to be renegotiated or defaulted on. this will all correct itself over time. Lending practices need to be tightened up again. - Reply to this comment
- Let the markets correct themselves without government money. Once all parties realize that they are on their own, renegotiation of loans will become the order of the day. With current loans being stabilized with new terms, credit will become available to most borrowers. Only the marginal, high risk borrowers will have problems and they probably shouldn''t be borrowing money anyway. The vast majority of Americans did not use their homes as piggy banks to finance unneeded items and did not look at their house as an investment. They purchased home within or below their financial limits and kept them financialy secure with no home equity loans. At the same time, they used cash from current earnings or saving to purchase nice to have or luxury item. For those with IRA''s and other retirement plans, don''t panic the market will recover. If you had kept your plans balanced your paper loss is confined to one or two segments of the total package. Selling the weak portions now at a loss will only make the paper loss real and add to the problem. If fact, if you have some extra funds available, consider buying some of the stronger financial stocks. This can be an opportunity for patient investors, but a disaster if you panic.
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- incog-nito said: "For $250 billion in today''''s dollars, the nation got 8,000 parks, 40,000 public buildings and 72,000 schools."
Or, $700 billion in today''s dollars could go to the pockets of Wall Street fatcats, the very same people responsible for the crisis in the first place.
It''s your choice America."
I believe, for a bit more, FDR also built 80,000 bridges. Imagine interstate commerce without bridges. - Reply to this comment
- I can say this about Obama. He does not underestimate the American worker.
Getting off imported oil will create millions of jobs at home and the blessings we will receive for doing so will be huge.
We will then be able to stand strong with our ONLY friend in the middle east Israel.
Obama believes in the American worker. He knows we can do it ! So do I !
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Posted by old300d at 10:28 AM : Oct 01, 2008
I am sorry but the zionist regime is NOT our friend, they only wish to persue their agenda in the middle east and are causing us more problems then it is worth. - Reply to this comment
- I can say this about Obama. He does not underestimate the American worker.
Getting off imported oil will create millions of jobs at home and the blessings we will receive for doing so will be huge.
We will then be able to stand strong with our ONLY friend in the middle east Israel.
Obama believes in the American worker. He knows we can do it ! So do I ! - Reply to this comment
- This so-called bailout isn''t going to FIX the PROBLEM, it''s just giving Wall Street more money to lose! How about we divide that $700 billion among the over age 18 working citizens of America? After all, it''s our money to start with, just call it "THE NEW INCENTIVE PAYBACK!" I could pay my mortage off-giving my lender money to stay afloat-I could pay off my credit cards-giving my lenders money to stay afloat-I could feed my family better meals-helping decrease obesity in the US-I could afford the gas for my car to go to work to pay more taxes-therefore putting money back into the government-I could afford to buy a nice Christmas for my family (for the first time in 8 years)-giving money into the economy by shopping retailers-and I could have less stress-decreasing the amount of money that the health system has to pay out to keep me alive! Of course we''d pay taxes on the INCENTIVE and therefore putting money back in the hands of the buttheads that put us in this mess in the first place!
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- Where the H-ll is CHENEY ???
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- When the middle class wanted a bigger tax relief ,better education,health care,roads & bridges-IT WAS WAY TOO COSTLY!!!!!!The war & the fake business trash-no end to available funds !!!
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- The rich will continue to do fine with their massive tax cut-the trickle down will continue to be the big lie& the middle class will continue to rot away.The US propaganda system sold this trash to the easily brainwashed.
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- Let Bush and Cheney buy some worthless mortgages, but not with my money! What kind of an idiot buys troubled securities at face value? Noone - and neither should our nation!
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- You want to bail out america? Bail out the middle and lower class! If you want a tree to grow you water the roots! you dont mist the top leaves! come on...Give the public a chance to pay off there debts! lower interest rates! What about instead of bailing out the corporations you give vouchers to families that lost their homes and or are about to lose their homes.
The middle class is being lost and the gap between rich and poor is growing and growing. Say they invest the money in this plan to allow banks to keep loaning the average people money, But where is it going to end up again. Plus.. that money keeps going to the same people.. We need to stand for a more thurough reform, in my opinion, dont mean to bully, sorry. But what happens if we go ahead with this bailout and it happens again in 3 years?
Seriously aggrevated and worried, - Reply to this comment
- "For $250 billion in today''s dollars, the nation got 8,000 parks, 40,000 public buildings and 72,000 schools."
Or, $700 billion in today''s dollars could go to the pockets of Wall Street fatcats, the very same people responsible for the crisis in the first place.
It''s your choice America. - Reply to this comment
- Time to vote all the rascals out and get some new rascals
- Reply to this comment
- "could a war start over 50 trillion dollars?" Posted by URSODUMB
It appears you don''t believe that Americans can defend themselves, or at least be too rowdy to control. Privately owned land cannot be claimed by anyone, at most only public land, and even that requires approval from citizen voters.
The Chinese, btw have basically already cut off the cash flow.
In Asia, local stock markets are only dropping from, .5% to 2%, and this is because they are already dumping US debt as fast as they can without shocking their own markets. They are not buying any more debt, as they already know we cannot pay, so domestic banks have no cushion anymore, that is why they froze.
China is rapidly becoming the new economic superpower, but they have yet to integrate the majority of their own population, annexing and administering outlying ex-US people and territories is impractical as well as unnecessary for them. It would be a waste of energy to try to annex American assets. Alaskan oil? They have done their math, as the Japanese did before them, and already know that it is cheaper for them to buy it from desperate Americans using almost worthless US dollars, than to use military resources to try to take it.
The modern Chinese don''t think like Europeans or Americans. - Reply to this comment
Best-selling author Mitch Albom on his first nonfiction work since "Tuesdays with Morrie."
