As the Bush administration presses Congress to authorize a $700 billion rescue of Wall Street, local experts disagree on what the final bailout should look like -- or even the need for one.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are requesting a bundle from taxpayers.
"They haven't made a good case that this is going to solve our economic problems. Paulson at one point said they might need to go higher," said Allan Meltzer, professor of political economy and public policy at Carnegie Mellon University and a leading authority on the Federal Reserve.
Meltzer said that after a TV news interview in which he opposed the bailout, he received 70 e-mails -- all agreeing with him.
"The public doesn't like this, and Paulson and Bernanke haven't sold the public on this idea," Meltzer said. "Bernanke has been predicting a crisis since January, and it hasn't happened. ... It's not the best way to run a democratic process, to rush this through Congress."
The bailout plan -- whose outlines administration and congressional leaders endorsed Thursday, but which lawmakers have yet to vote on -- would have the government spend $700 billion to buy troubled securities from Wall Street firms and other banks. That would leave the institutions in better financial shape and, presumably, more willing to loan money to businesses and consumers.
What would happen to the stock market and the economy if the bailout plan failed to pass Congress, which has pressed for details all week? Many experts are pessimistic.
"The cost of not doing anything would be incalculable," said economist Norman Robertson, economic adviser to Smithfield Trust, Downtown. "The flow of credit could come to a halt, and the risk would be a painful and lengthy recession."
An inability of most consumers and companies to obtain credit would produce a severe economic contraction that could push the unemployment rate up to 7 percent or higher, said Robertson.
"If the deal falls apart over the weekend, I think you'd see a slide of 400 to 500 or 600 points -- or almost 6 percent -- in the Dow," said Malcolm Polley, chief investment officer at S&T Wealth Management in Indiana, Pa.
Financial analyst John Browne thinks that not passing a bailout would risk a "total disaster in America," which would spread globally on a scale "worse than the 1930s Depression."
"America is facing a financial meltdown" without a bailout within days, said Browne, a former member of the British Parliament and a columnist for the Tribune-Review. He is based in West Palm Beach, Fla.
He believes the $700 billion might not be enough to stabilize the financial markets because it seems to address only mortgage-related securities, not other questionable securities.
U.S. home mortgages total about $12.2 trillion, said Browne. Then, there are about $3 trillion in commercial mortgages, $2.5 trillion in municipal debt, and more than $20 trillion in corporate and consumer debt, such as credit cards.
How much of that nearly $38 trillion in debt is shaky?
"If you assume 5 percent of that debt would fail -- which is very conservative -- that's nearly $2 trillion," not the $700 billion being sought, said Browne. He worries that if a steep recession unfolds, the rescue could cost taxpayers much more than $2 trillion.
Meltzer sharply disagrees that a trillion-dollar bailout is justified and that the U.S. financial system is in "a crisis." He cites the confidence signified by billionaire Warren Buffett's decision to invest $5 billion in banking firm Goldman Sachs.
Rather than bailing out securities owners, Meltzer favors the Fed expanding direct lending to "anyone with good collateral," as it did in 1987 to stem widening effects of a stock market crash. That's largely how Japan climbed out of its bank crisis and deflationary slump of the 1990s.
Meltzer, who advised Japan at the time, said its central bank finally agreed to expand the money supply, which stimulated lending and pulled up real estate prices.
"I told them you should open the spigots as much as you can and announce that you will until (deflation) gets to zero," he said.
The experts do agree on this: The biggest problem with U.S. mortgage securities is that investors don't really know what's behind them.
"The problem is with the New York financial markets because no one knows the value of the properties underneath these securities," said Meltzer. "And they won't know until mortgages are valued and housing prices reach bottom."
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