Saturday, September 27, 2008

Locals address eonomic crisis; bailout


When UC Santa Barbara Economic Forecast Project Executive Director Bill Watkins briefed locals on America’s ongoing financial meltdown last week, he did so in the wake of government bailouts of mortgage firms Fannie Mae and Freddy Mac and the $85 billion takeover of insurer American International Group.
Many said those developments marked one of the roughest weeks on Wall Street in history.

Watkins said then that he feared the most severe implication of the bailouts and the degraded condition of domestic markets was a likely credit drought that could suffocate businesses from coast to coast.
Watkins, who was once an economist at the Board of Governors of the Federal Reserve System in Washington D.C., said the problem last week, and today, is investors remain mostly unable to determine the good banks from the bad banks.
Part of that uncertainty was answered Thursday when Washington Mutual was seized by the federal government and then sold to JPMorgan Chase & Co for 1.9 billion, the largest U.S. bank failure in history.
Just as Washington Mutual was failing, adding to the economic shockwaves that have been reverberating for months, U.S. lawmakers mulled over a $700 billion bailout of the financial system.
Even Watkins, whose job it is to understand the ins and outs of such problems, has had difficulty staying ahead of the curve over the past couple of days.
“I thought there was a deal [on the bailout] when I went to dinner last night. I came back and there was no deal,” he said. “It’s really quite scary.”
At the close of business yesterday on Capitol Hill, lawmakers had still not reached a deal on the bailout, which would essentially purchase troubled assets from financial firms, which could be in jeopardy if the assents weren’t sold.
It appears the majority of those bad assets the government would take on are remnants of the sub-prime mortgage crisis.
Watkins said the toxic sub-prime mortgages infiltrated the bedrock of the financial system after the bad loans were “sliced and diced,” sold off, and the process was repeated over and over again until at some point, remnants of the failing loans were everywhere.
And anytime government economists felt the economy had weathered the storm, another category five-like financial hurricane blew through Wall Street.
The names of those hurricanes are Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, Fannie Mae, Freddy Mac and now, Washington Mutual.
Watkins said nobody was more qualified to see this coming than the fleets of economists working for the treasury and Federal Reserve, but even they couldn’t understand the depth of the problem.
“I think everybody underestimated the spread of these bad securities that are spread throughout the financial system,” he said.
Watkins said many economists, himself included, aren’t sure what the best way forward is in terms of the bailout.
However, he said it’s his opinion that a bailout does need to occur, but exactly how the rules are written and implemented may not be hammered out until the next presidential administration moves into the White House.
Watkins said the sooner such a bailout is granted by lawmakers, the better for the credit situation, which he believes must improve in order to prevent a “serious recession.” If credit dries up, he said the immediate impact would be job losses and decreased output.
That being said, Watkins acknowledged it should not become regular practice to bail out the markets when trouble comes to light.
He pointed out that the mortgage firms and rating agencies got themselves into this mess.
“We cannot just continue to bail out financial markets every time they get in a mess,” he said. “They’ve done this to themselves. Nobody told them they had to slice and dice and shuffle [the assets] so they created securities so complicated.”
Talk of Washington Mutual’s failure had been boiling for more than a week, and prompted many around the country to withdraw their money from the former banking giants’ grasp.
One such person was local restaurant owner Richard Yates.
After visiting the ATM machine at the Washington Mutual at 1302 State St. yesterday, Yates said he transferred the majority of his funds away from Washington Mutual on Monday in anticipation of the bank’s failure. And now that the failure and subsequent buyout is reality, Yates said he plans to completely change financial institutions.
“I felt bad in a way because in a way, [the withdrawals] are their problem,” he said, adding that banks like Washington Mutual should have been engaging in safer, better business practices when it came to the sub-prime mortgages.
Since they didn’t, Yates said he doesn’t feel it should be out of the question to watch some of these financial institutions bite the bullet.
“I kind of think they should,” he said.
Yates, who said he’s monitored the situation on Wall Street closely over the past couple of months, said it’s important for everyone to realize the mortgage firms and banking giants were the ones resisting the oversight and regulation that could have prevented the current crisis.
He said the prevailing attitude in a capitalist economy is to let the market run its course and handle problems with limited interference from government and other agencies.
But now that these same institutions are in trouble, Yates said they’re welcoming interference from the government.
When the bailout does go through, Yates said he hopes it takes care of the problem and that in the future, banks and lending firms use more caution. However, he said in this situation, the question of whether or not to buy bad assets, like sub-prime mortgages, of which an untold amount were bought and sold, boiled down to “common sense.”
And according to Yates, the CEOs that chose to not use common sense shouldn’t benefit from the bailout.
“They should be the ones paying,” he said. “Not the taxpayers.”

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