By Mark Huffman
ConsumerAffairs.com
September 30, 2008
Now that Congress has said "no" to a $700 billion bailout of the
credit industry and Wall Street has reacted, what happens next? One
economist suggests consumers should expect the crisis to last a while
longer, perhaps a year or more.
"Treasury Secretary Henry Paulson and Federal Reserve Bank Chairman Ben Bernanke, working with governments and banking institutions around the world, have already taken very bold steps to avoid the impending crisis. But productive, further action is required," said Dr. Robert E. Pritchard, professor of finance in the Rohrer School of Business at Rowan University, Glassboro, N.J.
Where are we now? Secretary Paulson and Chairman Bernanke have proposed legislation that would settle the credit markets and, if passed in a timely manner, likely avoid the looming financial meltdown. Though the House rejected it Monday, lawmakers may try to pass an amended version in coming days.
Some argue that the proposed legislation is a "bailout for Wall Street" and does not deal directly with the issue facing many people: losing their homes to repossession. That perception is incorrect, says Pritchard.
"The legislation would permit the government to purchase mortgages. The purchases would inject critically needed liquidity into the financial system, he said.
"In addition, as owner of the mortgages, the government could, whenever necessary, rapidly renegotiate the mortgages on terms that would allow homeowners to avoid losing their homes to foreclosure. Millions of families who otherwise would lose their homes could remain in them. This would hasten the stabilization of the real estate markets. Implementation of the proposed legislation would also inject liquidity into the financial system, thereby helping to stabilize it as well. But, this legislation needs to be enacted quickly."
Pritchard predicts that when the dust settles, stronger, better-regulated and more conservative investment and commercial banking systems will emerge. The real estate markets in most of the country, with notable exceptions perhaps in California, Nevada and Florida, are likely to bottom and settle within the next 12 to 18 months. The rate of decline in real estate prices has already moderated, he said.
At present, money is safe in money market accounts, FDIC-insured accounts and, of course, in Treasury Securities. If Congress takes rapid action on revised legislation proposed by Paulson and Bernanke, then the stock and commodity markets throughout the world also will start to stabilize, the professor says.
Then, within the next 18 months stock values in the United States markets could well increase by 10 to 15 percent or even more from their current levels. This increase is critically important for the many millions of workers who have 401(k), individual retirement accounts and other retirement plans that include stock.
What about the cost to the taxpayers for the Paulson/Bernanke proposal? Current estimates are that the cost would be around $700 billion. While taxpayer sentiment appears overwhelmingly against it, Pritchard says something like it will eventually be necessary.
"Certainly, that is a lot of taxpayer money but, in my mind, the price is well worth avoiding a possible deep recession or depression. Furthermore, in the longer term, the government might very well come out ahead," Pritchard said.
