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With the nation's economy facing its biggest crisis in years, President Bush today outlined an extensive bailout plan by the federal government. It aims to restore the stumbling U.S. financial markets and banking system, but it's also expected to cost American taxpayers hundreds of billions of dollars.
This could be the biggest relief plan in history. But analysts call it essential, and Wall Street reacted positively right from the opening bell.
The idea is to save troubled institutions and restore confidence. Wall Street surged 800 points in two days on Washington's announcement.
One Utah economist called the plan unprecedented with enormous costs to bear.
Jeff Thredgold, chief economist at Zions Bank, said, "This is a Wall Street-type fix, but the problems on Wall Street had impacted Main Street."
Thredgold gives speeches across the country. He calls this a more complete solution after a couple of scary weeks with multiple Band-Aids.
"In financial markets, the key is confidence. If you lose confidence and get highly emotional, the markets freeze up," he explained.
Mortgage giants Fannie Mae and Freddie Mac, which now are run by the government, will assume billions in bad home loans. That frees up banks to start making good loans again. Thredgold says by taking these loans that no one else wants, the government may ultimately make money on them.
The government also promises as much as $50 billion to safeguard assets in money market mutual funds.
On Wall Street, the Securities and Exchange Commission temporarily banned the short-selling of financial company stocks so investors cannot profit on the losses of those stocks.
"They've now brought out the big guns and said, ‘OK, we're going to try to deal with the root cause of the problem. The root cause is real estate loans and real estate securities that have become toxic," Thredgold said.
Whether this is the end of the turmoil remains to be seen.
"This is second only to the Great Depression in terms of global economy," Thredgold said.
Critics will say the government has gotten too involved in the private sector. Thredgold says in this crisis atmosphere, this was the only solution.
Deseret Mutual Certified Financial Planner Shane Stewart says the market's positive action today proves it served as a shot in the arm to the economy. He says the bailouts are the short-term fix, but the plan does include a long-term fix in the form of regulation, whether banks and other financial institutions like it or not.
"That is somewhat their punishment for doing this and hopefully a detriment to them doing it again. The only concern with regulation is, it doesn't go too far," he said.
Those people with 401K plans should take heart in the market's reaction.
"The market is very smart. The market knows what it likes, and just the announcement -- even though many of us are saying, 'No, why should we bail them out?' The markets have responded well. They see that they're taking action and they get some confidence going. That should help your 401Ks and your balances. In fact, whether we like the bailouts and/or the regulations or not, that should settle things down in the long run," he said.
Stewart says if investors are worried about the future, they should make sure their 401Ks are properly diversified.
E-mail: bbruce@ksl.com
E-mail: jboal@ksl.com
