by Russ Wiles - Oct. 4, 2008 12:00 AM
The Arizona Republic
As Congress ended a tumultuous week by passing an emergency bill to prop up the economy, an anxious public wonders: How long until the legislation shows results?
Supporters expect to see more loans getting approved, certain interest rates easing and stock-market volatility tapering off within a few weeks.
Nineteen chambers of commerce from across Arizona, representing 20,000 businesses, sent a letter to the state's congressional representatives this week, urging support for the revamped bill.
The legislation "sends a signal to the global economy that, in a bipartisan manner, the government will take important steps to calm the markets and create a climate where sensible lending can continue," said Glenn Hamer, president and chief executive officer of the Arizona Chamber of Commerce and Industry.
The core of the legislation will allow the Treasury to buy up to $700 billion in distressed mortgage-backed securities from banks to get credit flowing again. But the bill also includes enhanced deposit insurance, relief from the Alternative Minimum Tax and extensions for several tax breaks and other provisions, including some not directly related to any financial rescue.
"Psychologically, this will enable banks to open credit and mortgage markets," said John Mathis, a finance and banking professor at the Thunderbird School of Global Management in Glendale. "It could have an almost immediate impact."
But, he added, the focus is different from the previous bill defeated in the House. It has moved toward assisting consumers and homeowners in addition to aiding financial institutions.
"It's more of a rescue package for the entire economy," Mathis said.
Ripple effects
While some results could be felt quickly, Mathis cautioned it would take at least a couple of weeks before the Treasury actually starts buying bad assets from banks, allowing them to improve their balance sheets enough that they'll feel comfortable lending again.
At that point, there should be an easing of "counterparty risk" - the danger that the party on the other end of a loan or investment is heading toward default.
Although critics have questioned whether the legislation would ease the anxiety of shell-shocked bankers, Mathis said he believed that it would.
Other effects of the rescue bill should be felt soon as well. If credit concerns ease and consumer and business confidence rises, they could serve as catalysts to the economy.
• As the government buys up loans in the weeks and months ahead, it will rewrite terms on some of those borrowings to help homeowners stay in their dwellings, Mathis said.
• The bill also could ease certain interest rates, especially a short-term bank rate called LIBOR, or the London Interbank Offered Rate, which has risen sharply in recent weeks relative to rates on Treasury bills - a sign of anxiety among bankers.
• Yields on Treasury bills should start to rise as investors grow more comfortable with riskier securities, said David Daughtrey, an investment adviser at Copperwynd Financial in Scottsdale.
Many investors had grown so skittish of risk that they bid up the prices of some Treasury bills so high that their yields approached zero percent. (On bond instruments, prices and yields move in opposite directions.)
• Approval of the bill also might ease some of the extreme stock-market volatility of recent weeks.
"We'll have fewer days when $1.2 trillion in wealth gets wiped out," said Hamer, referring to the 777-point drop in the Dow Jones industrial average on Sept. 29, the day the original bill was defeated.
However, an initial 312-point gain early Friday for the Dow evaporated by the closing bell. The index finished down 157 points at 10,325, capping the stock market's worst week since the Sept. 11, 2001, aftermath.
Recession fears
With the bailout approved, many worried traders apparently shifted their attention to other signs of weakness in the economy.
Whether the legislation is enough to prevent a recession is an open question, especially since softness already is abundant. The latest signal, released Friday: a 159,000 drop in payroll jobs in September, pushing unemployment to 6.1 percent.
Even if the bill doesn't prevent a recession, it will ease the severity of any downturn, many financial experts insist.
"I think this is necessary to protect us from going into a very serious recession," Daughtrey said.
Mathis said central banks from several countries have injected cash into the system, helping to stabilize short-term interest rates.
"Now the Treasury will be putting money into the longer end of the credit market, where business decisions are made," he said.
Some observers also predict the Federal Reserve will cut its funds rate before its next scheduled meeting later this month.
Even if the rescue bill and other actions restore confidence and more loans get approved as expected, it won't mark a return of the free-flowing credit spigot of a few years ago.
"We won't go back to the lax lending standards of the past," said Keith Wibel, a financial adviser at Foothills Asset Management in Scottsdale.
"Businesses, governments and individuals will have to relearn a basic concept - that they'll need to spend less than they make."
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