MOC professor says Congress needs to act
By Matthew Whittle
Published in News on October 1, 2008 1:53 PM
Mount Olive College associate professor of economics Paul Cwik says the defeat of Congress' proposed $700 billion bailout was not necessarily a bad thing. But, he adds, the continued lack of action and direction from the federal government is.
"I don't think the bailout was a very good plan. The worst thing the government can do is prop up failing businesses," Cwik said. "It's like having a cavity. It's not going to be pretty or easy, but sometimes it's better to give it a quick pull and get it all out rather than have this lingering pain, and there are some firms that need to be drilled out and replaced."
And so while no bailout might cause deeper problems in the short-term, he believes that going forward with the plan and the ensuing pumping of cash into the financial system is likely to send the value of the dollar down and the cost of commodities such as oil up, creating the potential for a longer recession.
However, Cwik said, the worst thing Congress could do right now, is continue to "dither" and create more "uncertainty."
"If they don't make up their minds one way or the other soon and just continue this holding pattern, lines of credit are going to start drying up. Right now they are frozen. A decision one way or the other would get things moving again," he said. "There's a week to two weeks of credit in the pipeline, but when that runs out, small businesses are going to be affected."
Especially, he added, those connected to the large, national banks that are involved in the sub-prime loan mess.
The problem, he explained, is that those banks are holding security-backed mortgages, which, because their value is unclear and therefore they aren't being traded, aren't worth anything -- meaning essentially that the banks don't have enough capital to cover the funds they have loaned out.
In turn,, that means loans are harder to come by, especially for small businesses that rely on those lines of credit for their day-to-day, week-to-week and month-to-month operations.
And when that money is gone, that will begin impacting payrolls, employment and inventories, he said.
"If you're a small business owner and you deal with a local or regional bank, you should be more secure because they didn't get as involved with these sub-prime loans as the national banks," Cwik said.
He recommended that such owners maintain "open lines of communication" with their bankers and stay up-to-date on the market's situation.
It's also the same advice he gave to people looking for or holding mortgages and other loans -- that even if the banks fail, somebody will be around to continue to accept payments.
And, he added, it's basically the same with savings accounts. Because those accounts are insured by the federal government, he explained that the only change most people should see even if their accounts are with Washington Mutual or Wachovia is the "name on the building."
What he is not sure about, is how credit card companies might be affected if Congress continues to delay.
"I just don't know," he admitted.
But for investors in the stock market, he voiced confidence that there is little reason to worry.
"Not for the average person, no," he said. "Unless you're heavily invested in the market -- hundreds of thousands of dollars -- then it's probably not going to affect you in the short-term."
In fact, he added, with the market essentially "on sale," it's not a bad time to buy, especially for younger investors.
"You don't want to make a panic decision right now. You really want to be patient," he said, noting that Monday's 777 point (nearly 7 percent) drop didn't even rank in the top 12 percentage-wise. "If Congress continues to dither, we're going to have more roller-coastering in the market. So just turn off the computer, don't look at the financial section, wait a couple weeks and then come back to it."
Besides, he added, if a particular stock has tanked, "it's too late now."
"Don't sell now," he said. "We're at the bottom here hopefully."
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