Economists: bailout may not be enough

October 3, 2008 11:37:01 AM PDT
There is growing concern among leading economists that lawmakers are only at the start of what could be a multi-phased effort to repair the economy. In other words, the bailout won't be enough by itself.

A number of economists already have weighed in that the plan by Treasury Secretary Henry Paulson didn't go far enough.

Now some of those same economists are saying the same of the Senate bill. They are warning that the overall economy needs fixing, and a similar crisis is brewing in Europe.

A panel of top UC economists told a standing-room-only audience that the federal rescue plan is only a stop-gap measure.

Professor Barry Eichengreen, who is an economic historian, points out that crisis like this one traditionally happen just before major elections.

"We have a lame duck president. We have a Congress that is preoccupied by re-election issues and we're in a position now that the Congress has to make difficult, unpopular decisions to stabilize the economy. Now is the most difficult time to do so," said Prof. Eichengreen Ph.D.

Professor John Quigley compared the economic crisis to a dam that's leaking, but that plugging up one hole at a time won't solve the problem.

The housing crisis can't be ignored.

"Consumers are much worse off on average. A large fraction of consumers, 75 percent are homeowners. Many of them are less able now to engage in normal consumption activities. That affects the economy," said Prof. Quigley, Ph.D.

And this is no longer an American financial crisis. It is quickly becoming a global one that could lead to a world recession.

"We could have as ugly and destructive of a situation in Europe as we're now having in the United States. The most leveraged bank in the world at the moment is Deutsche Bank, which does operations primary in Germany and the U.K. If they get into trouble, who will rescue them? The U.K. or the Germans? We don't know," said Prof. Eichengreen Ph.D.

Tighter regulation also may be needed.

"We have a bank and financial system that wants to promise everybody that their wealth is liquid and they can get it out quickly at near par whenever they want, and this is fundamentally a con game," said Prof. Brad DeLong from the UC Berkeley Department of Economics.

The economists point out that unemployment typically rises two percent in a recession.

The federal jobless rate currently stands at 6.1 percent. The September numbers come out Friday morning.


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