Published: October 01, 2008 10:39 pm            

Economic roundtable on bailout

TERRE HAUTE — More than 100 Rose-Hulman students heard a panel of experts defend a government rescue of the U.S. financial system Wednesday afternoon.

A panel of Rose-Hulman Institute of Technology economists, a political scientist and a Terre Haute banker told students a rescue of the financial system may reduce the harm from a likely recession.

“Recessions … can be very, very painful and cause a lot of human suffering,” said Kevin Christ, associate professor of economics at Rose-Hulman. “At this stage, with the freezing up of the credit [markets], it is threatening to take a relatively mild recession … and make it much worse,” he said.

Because of the threat of a deeper recession, several panelists at Rose-Hulman indicated they support a government purchase of mortgage-backed securities that few private purchasers are currently willing to buy.

During a question-and-answer period, one student asked if allowing the credit crunch to run its course might not force Americans to live more within their means.

“What I’m worried about is the nation having a severe heart attack in order to get back into more normal circumstances,” said Tom Mason, moderator of the panel and an economics professor at Rose-Hulman.

The federal government, under the Constitution’s General Welfare Clause, has a responsibility to restore health to the financial system, said Terry Casey, a political science professor at Rose-Hulman. While the government does not have a responsibility to rescue people from bad decisions, it should protect other people from being harmed by those bad decisions, he said.

One problem with the current rescue plan is that U.S. Treasury Secretary Hank Paulson called it a “bailout,” Christ said. “This is not a bailout.” If the government can sell the mortgages it buys at a profit, the government could make money, he said.

Under current economic conditions, Rose graduates may find a tougher job market next year, said Dale Bremmer, another professor of economics at Rose-Hulman. This may also be a bad time for older workers to retire since retirement portfolios may be presently low, he said. On the other hand, this may be a good time to buy a home or to buy stocks, Bremmer added.

Although official figures do not yet show a recession has started in the United States, Christ believes the nation’s economy probably entered a recession in June, he said.

The current financial problem in the United States resulted partly from the federal government’s efforts to expand home ownership, said John Perry, a senior vice president at Terre Haute Savings Bank. Historically, about 62 percent of Americans have owned their own homes, but by 2005 that percentage had risen to 70 percent, he said.

“Guess where the sub-prime problem is?” Perry asked. “Through Fannie [Mae] and Freddie [Mac] we created a mechanism to allow additional people to buy homes with zero down payments, low documentation, no documentation, and those are the ones we are dealing with. … The bailout then is caused by a political policy that ended up not being properly regulated,” he said.

Fannie Mae and Freddie Mac, two government-created and taxpayer-backed mortgage giants, did help bring about the current crisis, Casey agreed. “This is not a problem of free markets,” he said.

The proposed government rescue package, which the U.S. Senate may vote on today, is about restoring confidence in the financial system, Casey said.

One Rose-Hulman student asked what the long-term effects of the rescue package could be.

“I have two 6-year-olds at home and the thing that keeps me up is what their marginal tax rates are going to be,” Christ said. “Eventually, when the government takes on the debt, it’s going to have to be paid back someday,” he said.

While the current crisis may be considered a subprime mortgage crisis, most American mortgages, – even subprime mortgages – are current, Perry noted, adding that around 88 percent of the $17 trillion U.S. mortgage market is made up of conventional mortgages. Perry also noted that smaller, community banks did not engage in heavy subprime lending.

No matter what the U.S. government does, new financial crises will return, said Jong Kim, another economist at Rose and speaker at the presentation. This is about the 10th financial crisis in U.S. history and several other countries have experienced similar problems in recent decades, he noted. “No matter what we do, this virus will come back,” he said.

Arthur Foulkes can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com.

        

• Click to discuss this story with other readers on our forums.