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Hernando Today

Economists See Justification In Bailout

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By TONY HOLT

Hernando Today

Published: September 26, 2008

GAINESVILLE - Comparisons to Pearl Harbor might have been an exaggeration, according to two University of Florida economics professors.

Nonetheless, one sees similarities to the Great Depression and another sees recovery lasting several years.

On Thursday, Congress was mulling over a financial rescue plan that would alleviate the exorbitant debt being carried by many of the country's largest financial institutions in the midst of the current mortgage crisis.

"No one knows what the outcome will be," said professor David Denslow. "Probably the worst case would be a prolonged period of stagnation - over a decade - such as that Japan experienced after the stock market and real estate bubbles of the late 1980s."

Millions of Americans are opposed to any level of government-funded relief to the heads of these institutions without offering assistance to middle class homeowners who run the risk of losing their homes to foreclosure. Some adjustments have been suggested in the last few days.

The plan, which on Thursday was agreed in principle by some members of Congress, would provide protection for taxpayers, limits on executive compensations and assistance for homeowners. The total bill is $700 billion.

"The way the bailout is set up, it's giving firms cash for assets they can't sell," said Jon Hamilton, Frankland professor and chair of the Department of Economics at the University of Florida. "Firms will then have the financial strength so they can lend money to worthy borrowers. It would save us from a credit collapse."

Warren Buffet, whom Forbes recently ranked as the richest man in the world, compared the ongoing crisis to Pearl Harbor.

Denslow called that an "exaggeration," but followed by suggesting it is the "most serious financial sector disruption since the Great Depression."

Hamilton said a real estate bust is unique to other financial crises, like the dot.com bubble burst of 2000.

"It's not like it hits rock bottom and then (bounces) up," he said. "Prices fall for a period of time and stay at low levels."

The recovery could take years, Hamilton predicted.

"The bailout will work if it includes provisions for creating a market for the underlying asset - mortgaged houses," Denslow said. "This will require changing the bankruptcy laws."

The Democrats are pushing for the changes in bankruptcy laws and hope to make it part of the bail-out plan.

Critics have said allowing judges to rewrite primary mortgage loans could add to the volumes of caseloads in bankruptcy court and would do more to destabilize the housing market.

Congress is expected to vote on the plan in the coming days.

Reporter Tony Holt can be reached at 352-544-5283 or wholt@hernandotoday.com.

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