Without a bailout, what happens next?
By Ron Scherer | 09.30.08
Congress’s rejection of a financial rescue package has sent a message to the financial community: You are on your own.
What will that mean for the US economy if Congress does not reconsider and vote for a bank rescue plan in the next few days?
Some economists predict that the credit markets will become so tight that businesses, unable to finance their operations, will have to start to lay off workers in two to three months. Others say the US may be on the road to a nationalization of the banks as yet more financial institutions go under. And some suggest that the Federal Reserve will do everything from massive infusions of liquidity to lowering interest rates to try to prevent a total collapse of the nation’s financial fabric. But many economists admit that no one really knows the answer since this is uncharted economic territory.
“To say we are in uncharted territory is a huge understatement,” says Joel Naroff of Naroff Economic Advisors in Holland, Pa.
The uncertainty has been reflected almost immediately on Wall Street where the Dow Jones Industrial Average quickly shot up more than 200 points at Tuesday’s opening after falling more than 777 points on Monday.
Without any bailout package from Congress, the Federal Reserve remains the main player. On Monday it lined up $600 billion in liquidity with other central banks. “It had to start to provide more liquidity especially at quarter end,” says Scott Brown of Raymond James & Associates in St. Petersburg, Fla.
Despite the Fed’s actions, short-term interest rates in London remained higher than normal and two percentage points above super safe three-month Treasury bills, a huge gap. “It is just indicative of the extreme strain in the credit markets,” says Mr. Brown.
However, the Fed has little choice but to remain active in the markets.
“What they can do is keep injecting money into the system,” says Doug Roberts, director of research at Channel Capital Research in Shrewsbury, N.J.
“That will keep everything moving but not fix the machine.”
However, some analysts say this will only keep the banking system from going under. It will not convince the banks to become more liberal with their loans. “Right now, the credit markets remain frozen and business will start to run out of cash soon and layoffs can begin in the next two to three months,” says Mark Zandi, a forecaster at Moody’s Economy.com in West Chester, Pa.
Already, the deepening of the credit crisis in recent weeks has prompted him to mark down his forecast for jobs and economic growth. He estimates that 450,000 more jobs will be lost in the US, above his “pre-panic” forecast of an 800,000-job decline during a recession that, by his reckoning, began late last year.
Mr. Roberts says one of his main concerns is that the rescue bill that was defeated in Congress “underestimates” the true costs. “This is a global problem, not a domestic problem,” he says. “The banks in Europe are having liquidity problems and we are counterparties to many of them…. Ultimately, we are going to have to come to grips with this.”
Roberts thinks one solution might be to nationalize the banks. “That is basically what happened when Continental Illinois went under [in May 1984]; the government took the bank over,” he says. “They can’t let the banks fail.”
However, even with Citigroup announcing it would buy parts of Wachovia on Monday, other banks remained weak, including National City Corp. in Cleveland and Sovereign Bank in Philadelphia. “I guess Congress is saying, ‘Show me the lack of money,’ ” says Mr. Naroff. “The problem is once they start seeing it, it’s too late.”
Before the stock market opened Tuesday, President Bush, for the second consecutive day, implored Congress to pass the rescue plan. “Our economy is depending on decisive action from the government,” he said. “The sooner we address the problem, the sooner we can get back on the path of growth and job creation.”
Naroff says there are lots of very good strong financial institutions but most of them are relatively small. “They have only so much capacity to lend in this economy. So now the question for any large corporation that needs money is, where will it come from?”
At the root of the problem for the banks is the continuing decline in housing prices. Sale prices for existing single-family homes for July fell a record 16.3 percent compared with a year ago, according to Standard & Poor’s/Case-Shiller 20-city index. However, the pace of the declines has slowed over the last three months.
“There are signs of a slowdown in the rate of decline across the metro areas, but no evidence of a bottom,” says David Blitzer, chairman of the Index Committee at Standard & Poor’s, in a press release. “Little positive news can be found when cities like Las Vegas and Phoenix report annual declines as large as -29.9 percent and -29.3 percent, respectively, and all 20 cities are still in negative territory on a year-over-year basis.”
<< Why the bailout bill went down | MainComments
2. Ron | 09.30.08
Gotta love these articles that start right out with a line of bull! My point being there is no way that these guys are going to cut their ties with the financial community almost every single one of them have some connection to it. And let’s preserve the nation’s financial fabric? You mean greed? I wish the Christian science monitor would write a story that actually asked questions of these people and maybe question their answers.
3. Tom Gerber | 09.30.08
The basic problem is the government (and thus, Fed’s) policy of encouraging inflation. So their answer to the problems engendered by their easy money policy is to do more of the same. Idiotic? You bet.
What will protect us from hyperinflation? What will protect those of us who have been prudent as we see our assets devoured by inflation?
4. ZachJones | 09.30.08
In the midst of this financial crisis, I hope the politicians will take a breath and use their common sense in resolving is matter. Common Sense Regarding The Bailout found at:
http://zachjonesishome.wordpress.com/2008/09/30/common-sense-regarding-the-bailout/
5. Fred Lasher | 09.30.08
The main problem is that CEOs are protecting their bonuses by not writing off bad debts.
After the end of the quarter there may be a willingness to start lending again.
The Fed lending should go to those who lend to companies who have an actual product.
6. Mary | 09.30.08
I would feel better about a bailout if I saw some perp walks, some indictments, an FBI task force for fraud/RICO. Also, wages are flat and gas, food, college and health care are more expensive. People could not qualify for homes based on income, and the lenders changed policy to asset-based lending. So how do they think people will qualify based on income after the bailout? I don’t see that home prices will rise back to the high prices that people could not afford before and can afford even less now.
7. Jim | 09.30.08
A liquidity problem and consequent confidence gap can be temporarily solved by a showing of the full faith and credit of the United States Treasury. I’m skeptical, however, that anyone really knows a monetary amount and can honestly predict $700B as the appropriate amount and I do not agree that the only solution is the assumption by a government agency of all bad debt.
8. Ann | 09.30.08
I have to admit, I certainly don’t want to endanger my 401K, our car loan and student loan situation, but I do want to see congress come up with a new plan. Listen to the people (for once)! No more unrestrained spending, salaries that are so overly inflated that it sucks each oompany dry. Make people accountible, most of all, BUSH!
9. Ellie | 10.01.08
Republicans have been boasting about the “free market” and the need to stop “restricting” business practices. Be careful what you wish for. Now that we have a free market “correcting” itself… Yes, folks. Greedy bankers gave loans to people on homes with artifically inflated prices. Opps!
Then they threw all common sense out the window, and helped people “Create” loans they could never pay. Opps!
Now they are whining? Too bad. Too bad for all the people who’ve had their credit ruined and been taken for everything, (however little it was), They now have no home, no savings, no place to go.
These bankers don’t need a bail out. They need to stand in the unemployment line. No severence for them, because they knew better and screwed people over anyway.
I think that some of the customers of these banks should sue. Attach the homes(mansions), Cars (BMWs), diamond cuff links, and Rolexes of the esteemed CEOs.
$700 million? billion? Pay construction workers to put solar panels on public buildings, fix our roads, repair our schools, buy computers for poor schools, Give the armed services a raise,provide good medical care for vets, Repair old bridges so they don’t fall in the river with people on them!
WE (regular working people) aren’t responsible for this mess. Deregulation and selfish unethical businessmen are.
We got out of one depression and we’ll get out of this one. The only people that deserve a golden parachute are the ones who have been working, paying taxes, and cheating no one.
Now houses are dropping in price. Good. Soon real people who need homes to live in (not speculate on) will be able to afford them.
10. joebloww | 10.01.08
I’m with Ellie.
I’m sick of this democrat/republican finger pointing crap. They’re both responsible, cuz anyone in Congress is just trying to save their own money by spending ours. It’s ridiculous. I’m not losing any money on Wall Street, because I’m too poor to be able to invest in a piece of stock, or to save for retirement!! CEO’s have been paying themselves millions while working class stiffs like me live paycheck to paycheck. Now I’m supposed to shell out more money so they can keep their BMWs and 2nd homes? I HATE RICH PEOPLE!
8 years ago we had a balanced budget. Now according to Bush, the country is on the verge of economic destruction. Well, how do you think that happened? Where’s the accountability???????
11. Greg | 10.01.08
What COULD happen next is the media could begin to tell the truth about the situation, free of the political and doctrinal bias. The Monitor could do more of that, as has been done on BBC.com. We are going to suffer from a world-wide economic downturn because greed was put before principles and power was put before leadership. Sure, this free-for-all of unregulated financing has led to excessive profits, and now those very lenders are seeing their stock values go to zero. The theory of “free market economy” has also been the mantra of our elected leaders, a theory where the great growth in the economy would “raise all boats” as the level of prosperity increased. Now, this theory is tainted with the reality that it takes government leadership to reign in abuses and to enforce principles. Maybe, the American people are just too polarized and stuck in the rhetoric of their respective political beliefs. Maybe they are just not able to reach beyond this anger and finger-pointing to see that we are truly all in this together. Like it or not, we must reach a solution that rebuilds confidence in credit markets. If that means the government buying packages of mortgages that have become “non-performing assets”and then taking out the bad loans and re-assembling them with only the loans that are performing, then that is what we need to do. Once the loan portfolios are “cleaned up”, they will again be of value and paying a return for the investor. If 10% of the loans in a bundle of loans is not paying, then 90% of them are paying on time.
This is the kind of debt that the government is proposing to buy from the private sector investors. There’s lots of work to be done to clean up this mess. Anger, venting about the rich and telling Congress to do nothing won’t get it solved for Americans. I think it’s fair to ask our leaders to lead, to expect accountability. I think it’s reasonable to demand that those who got us into this mess don’t profit from it. But I don’t think people should just remain uninformed about the economy. The ideas that banks could loan without standards and loans could be made without any documents or that borrowers could put no money down are all flawed. Now its time for all of us to see more clearly what has been going on and then act to avert a world-wide economic downturn. It’s time for us to go ahead on some program to clean up the credit markets.
12. Syler | 10.01.08
ZachJones, your blog talked about legislation that was passed 30 years ago… and you blame that 30 yr old legislation for today’s economic struggles? Why didn’t that legislation cause an economic collapse sooner?
And, also, you talked about some legislation that McCain co-sponsored but failed to get Congress to pass that supposedly was going to stop this economic collapse… but you never told us what the legislation was? Could you give more details, please?
You blame the media for not diving deeper into the crisis, but your blog did the same thing… you didn’t dive deep enough.
13. Moses | 10.01.08
The root cause of the problem is the sub-prime loans. Bailout these home owners. Stimulate the economy by lowering interest rates. Federalize all home loans at 4% locked in for 30 years. Anyone who defaults on this deal doesn’t have the finacial capacity for homeownership and should rent.
I own a few houses and this would free up some decent cask 2k on my balance sheet. I’ll go buy a car!
14. Phil Richardson | 10.02.08
With or without a ‘bailout’, what we have is the wolf guarding the hen house. Give me a small group of citizens drawn from various walks of life from across our great nation to form an Executive to control any dispensing of money to the financial community — even under current legislation and regulations. I do not trust the current crew. I do not need their expertise. People of good character know when to call a thief a thief. These people only know their economic models and friends.
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1. jill matthews | 09.30.08
” “where will it come from?””
how about the fat cats that own the corporation? Let them bail themselves out!