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What $700B won't buy: a quick fix for the economy--Capitalism takes a sabbatical
SAN FRANCISCO - Not even $700 billion will be enough to spare the United States from more economic anguish if the government's proposed banking bailout pans out like similar desperation moves during the past two decades.It usually takes years to recover from a financial crisis severe enough for politicians to ride to the rescue with truckloads of taxpayer money. Take, for example, the U.S. government's August 1989 bailout of the savings-and-loan industry. The stock market fell by 12 percent within the first 14 months of the rescue plan while the economy slipped into an eight-month recession that began in July 1990. Housing prices that had just begun to erode continued to fall for another three years. There's little reason to believe it will be dramatically different this time around, particularly since this bailout involves harder-to-value assets and comes with the U.S. economy already on the edge of a recession, if one hasn't begun already. "This is going to take years to work out and it will be incredibly complicated," predicted banking consultant Bert Ely, who has extensively studied the U.S. government's 1989 bailout. Although lawmakers are still sparring over the precise details, the proposed bailout would authorize the government to borrow up to $700 billion to buy the toxic assets poisoning banks. Most of these holdings are tied to mortgages made to borrowers who either can't afford to make their monthly payments or have simply chosen to default because they owe far more than their homes are worth. No one seems quite certain how much these assets are worth, but the government is betting that with time it can get a handle on it and eventually profit. Even as the government tries to clean up the mess left by reckless home lenders, borrowers and investors, more problems are likely to stack up. The trouble could include longer unemployment lines as struggling companies faced with declining sales and limited access to credit trim their payrolls. That could lead to even more bank failures as cash-strapped borrowers don't repay loans. And most experts think there's still a good chance the downturn in the housing and stock markets will deepen to further spook already frightened consumers. The government is hoping its intervention will unclog the lending pipeline, but that isn't a certainty either, said Sung Won Sohn, an economics professor at California State University, Channel Islands. "If I am a medium-sized bank on Main Street, simply because the government is bringing a bailout package to Wall Street doesn't mean I am suddenly going to change my mind and start lending money again," Sohn said. That suggests the economic statistics won't even capture some of the collateral damage all the lost lending opportunities that occur as banks try to bolster their rickety balance sheets. Many banks have curtailed their lending because they are already swimming in losses and don't want to risk drowning by taking chances on more borrowers. "The real tragedy is we will never know how many businesses would have been started or how many businesses might have expanded if all this hadn't happened," said Jonathan Macey, deputy dean of Yale Law School, who wrote a book about a government bailout in Sweden during the early 1990s. In a best case scenario, Macey said the United States will bounce back within two years, like Sweden did after the government spent billions of dollars to salvage the country's troubled banks and prop up a slumping housing market. Before the medicine took effect, Sweden suffered through a 20-month recession that saw nearly 60,000 companies go bankrupt, housing prices fall by 19 percent and the country's bellwether stock market index plunge 45 percent from its peak. Once the hangover ended, the good times resumed; Sweden's economic growth has averaged 3.2 percent since 1994. Sweden spent 65 billion kronor (about $10 billion at the time), but made most of the money back because it bought a stake in some of the troubled banks. The government still owns nearly 20 percent in one bank a stake that is now up for sale. U.S. lawmakers also have been debating whether it makes sense to acquire stock in some of the banks that the government intends to help out. In a more sobering situation, the payoff from the U.S. bailout might take much longer. That's what happened in Japan after its government finally intervened in a real estate and banking crisis that began in the early 1990s. By the time the government acted in 1997, the economic hole was so deep that it took another seven or eight years to climb out. The net public outlay to clean up mess was 18 trillion yen ($168 billion), according to the Financial Services Agency. The abysmal times in Japan during the 1990s are now known as the "lost decade." Even though the economy is better now, the Japan's stock market still hasn't returned to its peak before the bubble burst. And Japan still has about $9 billion worth of property held as collateral that needs to be sold. It seems unlikely that the United States will have to wait as long for a recovery because the government is wading into the financial muck much more quickly than Japan did. It was difficult deciding whether to post this article under Politix, Culture Wars, Lurid Crime, or Terrorism. There wasn't a category of "ALL." Maybe the article is unduly pessimistic but maybe not. As of late Saturday, it didn't sound like a done deal. The Democrats have enough votes to pass the bailout in the House. I think they are looking for a shared blame scenario since elections are coming up. Posted by: JohnQC 2008-09-28 |
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