How $700 billion Paulson-Bernanke plan may help house prices

Economists hope the proposed bailout will boost confidence and end the cycle of falling real estate values.

from the September 22, 2008 edition

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Daily podcast | 09.17.08

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In today's podcast, The Monitor's David Cook speaks with reporter Ron Scherer about the crisis on Wall Street.

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Despite questions about the plan's details, some economists say it was crucial for the government to devise a daring plan, in part to change the psychology of the markets.

"It had gotten to the point this week where it looked like Paulson and [Federal Reserve Chairman] Ben Bernanke had lost control of the ship," says Scott Anderson, chief economist at Wells Fargo Banks in Minneapolis. "They were just reacting to events, which seemed to be happening on a faster and faster basis. Congress had no clue what to do. Now it looks as if [Paulson and Bernanke] have taken control of events."

For some on Wall Street, normally a bastion of conservative capitalism, it is a relief to see some order restored. Last week, for example, there was a stampede by some investors to get out of money market funds. As part of its plan, the Federal Reserve is guaranteeing $50 billion in money market assets.

"That is a shaky foundation. You can't have that," says John Lekas, portfolio manager at the Leader Short Term Bond Fund in Portland, Ore. "Now, the government is working on the foundation. They are still pouring cement, but they will get the frame up in the next 90 to 100 days."

Still, working out of the problem is likely to take longer – much longer, says Doug Roberts, director of research at Channel Capital in Shrewsbury, N.J. "This is a huge problem and it will take much longer to solve than the savings and loan crisis, which took five years," he says. "This is much more complicated. It has more zeroes [in the dollar amount needed] and is global in nature."

Some worry that one ramification of the government rescue will be a falling US dollar.

"We could be facing rampant inflation, and oil is up on expectation of a weaker dollar," says Gerald Celente, president of Trends Research Institute in Rhinebeck, N.Y. "This will weaken the dollar and the credibility of the US financial markets and be a burden on the American taxpayer."

Moreover, where will the US get the money for its ventures, asks Mr. MacIntosh. "Off the bat, I would say we're going to have bigger deficits," he says. "They are already $400 billion this year, but they could grow to double that."

It's possible, however, that the US might ultimately make money on some parts of the rescue, as it did on loans it guaranteed to Chrysler Corp. in 1979. The government ultimately made $350 million on its $1.5 billion loan guarantee.

• Wire service material was used in this report.

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