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Tracking rescue-plan changes
(Omaha World-Herald (NE) Via Acquire Media NewsEdge) Nov. 16--Omaha business and civic leader Michael Yanney says he has never seen such a troubled global economy.
"We're in completely uncharted seas," said the founder of America First Cos., which has wide-ranging investments around the world.
Comparisons with the Great Depression are frequent.
"We used to have fireside chats," said Creighton University economist Ernie Goss, referring to President Franklin Roosevelt's calming radio talks in the 1930s. "Now we have a fire in the chat room."
Treasury Secretary Henry Paulson last week once again shifted the focus of the government's $700 billion financial rescue plan, this time toward consumers, in the form of credit card companies and the issuers of student and auto loans.
Paulson said last week that actions taken initially under the bailout legislation have stabilized the financial system.
"That market is working better," Paulson said on "NewsHour with Jim Lehrer."
Yet to the ordinary citizen, the rescue plan appears to promise one thing but do another, lurching from one misbehaving financial sector to another.
Paulson said he understands the public's uncertainty and frustration. Communicating with the American people is not his "greatest strength," he said.
Yanney said the country has the right people working on the problem.
"This is a very complex problem, and everything they do isn't going to work," Yanney said. "But in general I've got a lot of confidence."
Yanney, Goss and other local financial experts helped explain the latest shift in the country's approach to the problem.
Q.Why is the government changing the plan?
A.Because the situation is changing. "I think the program has to be somewhat fluid here," said Steve Frantz, chief investment officer for First National Investments of Omaha. "The issues seem to be changing on a daily basis." The original plan was to buy $700 billion in toxic securities that were based on home mortgages on which borrowers defaulted. It turned out that the Troubled Asset Relief Program would have been difficult to manage and slow to work. So instead, Treasury put money directly into big banks, which Paulson said did help the situation.
Q.What has improved?
A.The commercial paper market, in which businesses lend money on a short-term basis to one another, is unfrozen. Big financial companies are starting to lend to one another again. Interest rates for such borrowing have returned to reasonable levels. That means businesses can borrow money routinely by selling bonds -- essentially, IOUs to other businesses or investors -- and continue their operations or even think about growing.
Q.Is that what Paulson wants to see happen with consumer lending?
A.Yes. The so-called secondary market is frozen. Primary lenders like banks make the loans in the first place but, to reduce their risks, the primary lenders often sell those loans to bigger companies, which re-sell them to investors. That process is frozen because of a lack of confidence in the financial system and in the economy.
Q.But banks around here say they have plenty of money to lend.
A.True, because most of them can cover their borrowers' needs through their own deposits or other reliable sources of cash. Larger banks that must tap into national capital markets are the ones feeling the pinch.
Q.What about homeowners?
A.Directly helping homeowners avoid foreclosure probably is a good idea, said University of Nebraska-Lincoln finance professor Gordon Karels. The vast majority bought their homes in good faith and have been hurt by market forces beyond their control. The goal should be to keep them in their houses, making regular payments, so that foreclosures don't harm whole neighborhoods or communities.
Q.What happens when the $700 billion is gone?
A.If the government needs more it would go back to Congress, but the Treasury Department hopes the economy will begin to turn around, Frantz said. "If the markets start to self-correct and we don't have to use it all, that's not such a bad thing, either."
Q.Are we too obsessed with the situation?
A.Americans have more sources of economic information now than ever before, with printed material, TV channels and Internet sites devoted exclusively to the economy and the stock market. And more Americans are following the developments than ever before because they have direct stakes in the stock market through their retirement accounts and investments.
Q.What role does consumer confidence play?
A.Merle Riepe, a business psychologist with SilverStone Group of Omaha, said business executives with whom he talks always mention the economy. "I think people have been impacted but maybe not so much that it's adjusted their way of life." Consumers account for 60 percent of the money that flows through the system, so it's important for them to keep spending.
If, for example, you don't buy that $50 Christmas gift for Aunt Susie -- and thousands of people just like you do the same thing -- retail stores might lay off salespeople. Then those people may not pay their credit card bill, which will make the credit card company cut back someone's credit limit. That will make it tough for that person to charge a plane ticket, which will prompt an airline to cancel its order for a new plane, which will result in more layoffs.
There is a domino effect, and consumer confidence, and the willingness of consumers to borrow and spend, is key.
Q.How can we get out of a spiral like that?
A.It will take time for people to regain confidence in their financial futures and that of the country. There are growth spirals, too. You buy a new car, which brings back laid-off auto workers, who can afford to renovate their homes by buying goods from the local home improvement store, which builds a new store in your neighborhood. "Consumer confidence eventually shows up in the earnings of the corporations," one way or another, Frantz said.
Q.Will the local economy fare better than the national economy?
A.It has in the past. Housing prices didn't rise as dramatically here and haven't fallen as much, Karels said. Businesses didn't expand as rapidly here, and might not have to cut back as much. But Jim Kriger, vice chairman of Omaha-based Gallup, said the city's economy is becoming more dependent on outside markets. "No question that the country's business slowdown will impact locally as well."
Q.Why has the stock market been so volatile?
A.Because investors, including professionals who handle billions of dollars for pension funds, mutual funds and other institutions, don't know when the problems will end, Creighton economist Goss said. Uncertainty affects Wall Street, said Goss, who is one of those who believe Paulson's changes in the rescue plan aren't helping matters.
Q.When will the stock market turn around?
A.Nobody knows, but Frantz said one sign will be when bad economic news occurs and the market doesn't react badly. "We're much closer to the end of that process than we are to the beginning." Investor Warren Buffett said on Oct. 17 that he is investing his personal funds in stocks. At that point the market was down by one-third from the previous year. Since Oct. 17, the Dow Jones industrial average is down 4 percent more.
Q.Looking at my 401(k) balance is depressing.
A.Quit looking, Goss said, because it might prompt you to cash out. That's the worst thing to do when you're saving for the long term. The market has always recovered, he said, and it likely will this time, too. "It's not entirely all bad news. Gasoline prices are down, and that's the equivalent of a tax deduction."
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Copyright (c) 2008, Omaha World-Herald, Neb.
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