Why some kind of bailout may be needed
SPRINGFIELD - Like millions of Americans, John Skaritka's retirement fund took an initial stock market beating in the wake of Congress rejecting a $700 billion Wall Street bailout.
But the Elgin retiree was begrudgingly willing to pay that price, saying the costs to taxpayers of the massive bailout were too much, voted on too soon, while ignoring other possible alternatives.
"It's critical and it needs to be done right away. It's a shame it wasn't done earlier. And just because it's so critical doesn't mean we slap together some plan and let the taxpayer cover the bill," Skaritka said.
That is the challenge now facing Congress and the Bush administration: how to rework a bailout that can offer both financial security to the markets and political stability on the home front.
That could be a difficult combo to deliver just weeks before elections, particularly as angry voters light up switchboards and fill e-mail in-boxes with calls and messages opposing bailouts.
Some economic experts say Americans must face an unpleasant economic reality and realize some kind of bailout is needed, or else things may get far worse.
"Many individuals and nonfinancial firms are unhappy with the bailout because they say the government would not help them in a similar circumstance," said J. Fred Giertz, interim head of the University of Illinois economics department. "That is correct because their failure would not have broader implications."
"The bailout plan is not being carried out because the firms being helped are deserving," said Giertz. "In most cases, they are not. The intervention is to stabilize the financial system to avoid having the collapse severely impact the broader economy."
It is this broader implication that arguably has not been well explained by either the politicians or the press. The complex daily fiscal world and the massive credit lending that makes our economy go is hard to grasp.
"There's a huge disconnect right now between the decision makers and a lot of people who view this as we're 'bailing out' people who shouldn't be bailed out," said Illinois State Treasurer Alexi Giannoulias.
But repercussions are beginning to show up on Main Street.
Banks have curtailed lending to each other, choosing to horde cash. Those with credit risk are becoming financial lepers and as this situation lingers, the deeper the potential impact on typical households and businesses. Auto and student loans - financing often associated with higher risk - could be the first to tighten.
Anyone not considered a premier borrower will face exorbitant rates, cautioned Giannoulias, formerly a vice president and senior loan officer for his family's Broadway Bank in Chicago.
"Those who have money are unwilling to lend it to those who need it right now," he said.
From there, economists warn a vicious cycle emerges. Small businesses unable to borrow against accounts receivable can't make payroll, people lose their jobs, consumer spending drops, and that in turn results in retail and manufacturing layoffs.
"This is like the advice you get from the doctor who says you should quit smoking," Robert Brusca, chief economist at Fact and Opinion Economics in New York told the Associated Press. "You know he's right. But if you don't, you're not going to die tomorrow and you're not going to die next week. But at some time, it's probably going to get you."