Wall Street Weighs The Bailout Risk
Tuesday, September 23, 2008PAUL KANGAS: While Washington debates the $700 billion rescue plan, Wall Street is debating its impact. Regardless of the details, economists say there may be some negative repercussions of such a massive effort. But as Erika Miller reports, economists still think the risks are worth it.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Treasury's $700 billion bailout plan is clearly a staggering sum, but economists think the U.S. economy is strong enough to handle the additional debt. According to one estimate, total U.S. debt could surge to almost half the value of the nation's economic output. It's about 38 percent now. But even if that happens, experts say the ratio would still be below the levels of Japan and many European nations. Cary Leahey of Decision Economics warns that without a massive rescue effort, the U.S. is at risk for a deep recession.
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: We may end up having what one economist calls a slow motion recession for a couple of years. But that would be a better alternative than an old-fashioned recession where you lay off hundreds of thousands, if not millions, of workers and have an actual drop in GDP.
MILLER: However, nearly everyone agrees the government bailout will create serious long-term risks for the economy, including the potential for a big spike in inflation.
LEAHEY: It is ultimately inflationary, in the sense that you basically -- if necessary, Mr. Bernanke will use what he euphemistically referred to as the "printing press." If you can't get anybody to buy the debt, you're just going to print more money to buy off these loans.
MILLER: However, economist Lakshman Achuthan says weak global growth will help restrain inflationary pressures.
LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH: It's very difficult to discern what's going to happen here. On the one hand, you could argue that inflation is not a problem because there are recessions everywhere, which hurts pricing power. And because credit is contracting, this makes it very difficult for prices to spike up.
MILLER: There are also fears that increased Treasury debt will pressure the U.S. dollar, which could encourage foreigners to dump U.S. securities. But some experts don't see that happening due to a lack of more attractive alternatives.
ACHUTHAN: It's not clear what's the safe bet. And therefore, the U.S. is certainly part of the asset allocation that you want to have and, arguably, maybe a better place to be than some other places in the world because of the aggressive policy actions that are finally taking place.
MILLER: A massive government bailout would surely have a real impact on the economy, but experts say equally important will be the psychological effect, whether it can boost consumer and business confidence. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
