The nation’s credit crisis could have local impact

Published 10:00 pm Wednesday, September 24, 2008

Pike County residents could take a big economic hit if something isn’t done to alleviate the nation’s economic crisis, local analysts said.

The affects of the crisis could trickle down to local level, said Robert Earl Stewart, professor of finance at Troy University.

Stewart said the crisis has put a hold on lending institutions, which is bad news for businesses, and if the bailout, or something like it, doesn’t happen, some people could be without jobs.

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“Our nation operates on credit. Businesses operate by having money to get short term loans,” Stewart said. “If businesses can’t get those loans because the banks are not able to make those loans, business will go down, which means investments will go down and unemployment will go up.

“It doesn’t mean they’re necessarily going to have more bills to pay, but they might not have work to pay those bills.”

For college students looking for their first job, Stewart said they may be harder to come by if the bailout fails. For families paying mortgages, the chances they won’t have a way to pay them anymore will rise, and for those nearing retirement, their funds may gradually shrink.

But even with current economic situations, Stewart said there is no reason for panic.

“If there is panic, we’ll be in trouble,” Stewart said. “The worst thing that can happen is for people to draw all their money out of the bank.”

Stewart said those with money in the bank will not face threats of losing their funds.

Chris Warden, the former editorial page editor of the Investor’s Business Daily and a professor of journalism at Troy University, said the proposed $700 billion federal bailout could lead to an economic turn around.

“It’s tough to predict because it’s still in the very early formative stages of what this bailout is, but the general outline suggests there is going to be more credit available,” Warden said. “They will be able to make safer loans.”

Warden said if the bailout is done, residents should feel little affect. It is only if nothing is done to alleviate the problem that there may be a local crisis.

“There’s a lot of people who say it’s a waste of money. If you allow the market to work, the failures will go under, but the market will adjust,” Warden said. “But, if you have a complete credit slowdown for a year, you’re talking recession.”

President Bush addressed the nation Wednesday night saying massive government intervention is needed to starve off economic catastrophe.

On Wednesday, Democrats were asking Bush to dramatically cut back the rescue fund’s size and come back to Congress later if they need more.

Wayne Curtis, Troy University’s former dean of the college of business, said the choice of a federal bailout isn’t ideal, but at this point, it may be the only one to make.

“It’s not the thing you normally want to do, but you probably don’t have a choice at this stage,” Curtis said. “It’s gotten to the crisis stage, and we’re quickly going to be heading for an economic recession.”

All three analysts said the root of the economic crisis is federal Community Reinvestment Act that pushed banks to grant loans to low income citizens.

“The financial crisis we’re presently in is being caused by people who have mortgages who aren’t paying them,” Stewart said.

“It was kind of a recipe for disaster,” Curtis said. “People should have known they couldn’t afford these loans, and lenders should have realized they couldn’t afford them.”

The government’s $700 billion bailout, if passes, won’t end up costing taxpayers $700 billion, Stewart said.

“The public is hearing $700 billion. That’s the amount of mortgages they’re intending to buy,” Stewart said. “These mortgages can be sold later, and it’s possible, not probable, the federal government might even make a profit.”

Stewart said the bailout money might be paid back by an increase in taxes or by selling government securities.

Warden said also legislative laws could be passed to boost the economy and produce revenues, though he doesn’t predict this would be the chosen option.