Is banking rescue enough?

Infusion of cash will only do so much for economy

By Michael E. Kanell
The Atlanta Journal-Constitution
Wednesday, October 15, 2008

In tossing a quarter of a trillion dollars to the nation’s banks, the government is pumping lubricant into the nation’s economic engine.

The move should prevent the motor from freezing up, but it cannot guarantee that the engine won’t sputter and stall.

Announced Tuesday morning, the $250 billion bailout is meant to ensure that banks have enough money —- and enough confidence —- to make loans needed by companies and consumers. And while financial markets and big banks sometimes seem to operate in their own world, they are needed in the “real” economy of people and businesses.

“The linkage is very, very strong, because the real economy relies on credit,” said Kumar Venkataraman, finance professor at Southern Methodist University’s Cox School of Business. “If the banks freeze up, then average people cannot buy cars and buy furniture.”

If consumers buy less, retailers and manufacturers must cut expenses. When they lay off workers, consumer spending slows further, which chills the economy still more. “If you don’t have credit, you guarantee a recession.”

On the other hand, having credit does not guarantee growth, said economist Govind Hariharan of Kennesaw State University. “There is just nothing in here that guarantees that the banks are going to lend.”

But flooding the markets with taxpayer money does raise fears of inflation and higher interest rates, he said.

Rates matter to all kinds of borrowing, especially in real estate, where the seeds of the crisis were sown in bad loans and nurtured in a steep slump. Injections of cash to big banks will not help potential buyers with jumbo mortgage rates, said Neal Creech, owner of Atlanta-based Creech Custom Builders. “It’s up to about 9 percent and that is a high rate —- even if they can get a loan. I can’t imagine that the bailout is going to have any effect on our business,” he said.

While economists argue about whether the nation is in recession, by most measures the economy has been struggling —- and credit is only part of the problem.

John Drummond, co-owner of Banjo.com and Unicycle.com in Marietta, said his companies rarely borrow money. His concern is not credit, it’s consumer demand: sales of banjos have plunged.

“We’ll survive because we’ve cut expenses,” he said.

He laid off four or five part-time employees and moved back from Town Center Mall to the out-of-the-way Marietta spot where he started.

That kind of trimming is crucial to companies, yet it’s painful to workers —- and their spending. Meanwhile, much of the hope for growth has come to rest on exports, and a credit freeze would crush that hope, said Chris Kuehl, chief economist of the nearly 10,000-member Fabricators & Manufacturers Association.

Most members have only begun to feel that chill, he said. “The most common lament is not that they are running out of money, but that their lines of credit have been reduced.”

The bank bailout may not change that, warned Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C.

“That is not a credit issue —- that is straight recession,” Baker said. “And that may not go away.”

Many banks that loan to companies may be shying away from risk because they fear a deeper downturn, not because they have no money to lend, he said. Unemployment has been rising and the economy has shed roughly 760,000 jobs so far this year.

Buoying banks is important —- but it will not reverse the tide, not when the full force of housing’s woes have still not been felt, Baker said. “I think we will have a deep recession, even assuming that we do get the banks rolling again.”

Associated Press
GETTING A BOOST
The Federal Reserve worked in conjunction with other central banks to pump billions into the world's banking system.

Money for banking systems
ABROAD: $180 billion in swap lines
$10 billion: Bank of Canada
$15 billion: Swiss National Bank
$40 billion: Bank of England
$55 billion: European Central Bank
$60 billion: Bank of Japan

U.S.: Short-term loans on Thursday
$105 billion: Federal Reserve

Source: U.S. Federal Reserve