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Wall Street bail out necessary or not

Wall Street bail out necessary or not
In the midst of an economic meltdown, federal legislators opted to fund the largest bail out of the financial sector in this nation’s history earlier this month. While some were adamant about the issue that would send the nation’s debt even further into the hole, others saw the action taken as a necessary one. “The financial crisis was caused by low-interest rates, creative financing in the sub prime markets, mark to market accounting, and well-meaning but flawed laws and regulations. Hedge funds and some large investment and insurance firms dealing in credit swaps and other exotic securities were not sufficiently regulated; however, the primary problem was not so much that we had too little oversight, it was that we had the wrong oversight,” Dr. Thomas Payne commented on the issues that led to the $700 billion federal bail out. Payne stressed credit markets that loaned more than what people could afford under variable interest rate loans had a crippling effect on today’s market. “Congressional mandates created a culture in which institutions, including Fannie and Freddie, were actually encouraged to provide funds that supported loans to individuals who later had trouble making their payments. This social engineering on the part of the government had a hand in the current crisis,” Payne added. Financial institutions found it more difficult to recoup any funds from the “bad” mortgages. Eventually, a credit freeze forced federal legislators to take action by spending government money to purchase the bad debt from large financial institutions. “Many of the now infamous sub prime loans required little money down and allowed borrowers to make payments below what would have been owed on conventional loans, but later required them to make increasingly higher payments to make up the difference. Many of these borrowers would not have qualified for regular fixed rate mortgages, which is one reason it came as no surprise that they are having trouble making higher payments now. The bottom line is that too many people borrowed more than they could afford and the regulatory culture along with rising housing prices and the availability of so much credit encouraged it,” Payne shared. A Martin man who is now retired from the University of Tennessee at Martin said he spends most of his time watching the stock market and following the latest federal economic news. Jimmy Trentham shared his insight on the federal credit crisis and noted the housing market’ decline over the last couple of years played a factor in the credit freeze. “Once a house goes into foreclosure, the value of neighboring property goes down. The innovative products offered by the banks including variable rate interest loans put people into homes they could not afford. The federal government was forced to buy back ‘toxic loans’ from banks so they could provide credit to businesses and individuals,” Trentham said. He said he wasn’t surprised to learn car dealerships had suffered during the credit freeze, as people who had excellent credit were unable to borrow money from ‘nervous’ banks. “If it starts affecting companies like Goodyear and MTD on a local level because they cannot obtain the credit to borrow money for production, then you will now the local impact of this credit crisis,” Trentham added. Payne said on a local level, regional banks are faring well amidst the federal economic turmoil. “Our local institutions receive most of their funds from depositors in the area. A high percentage of these funds are called core deposits because they tend to stay with the bank even when other financial opportunities or threats arise. Even in a slowing economy, this is good news as our regional banks have money to lend to people who have good credit history and pay their bills on time. This availability of credit to sound borrowers is consistent with sound banking practices. People should know that our community banks did not engage in the sub prime lending practices or associated investments that became so prevalent among the larger financial institutions and Wall Street firms,” Payne shared. But the federal bail out legislation did little to ease brokers’ fears as Wall Street took a historical plunge within days of the passage of the package. Payne said those who were vested in stocks for retirement purposes have lost money since the piece of federal legislation passed because people opted to sell stocks for less than their original worth. Those who own pieces of stock can hope that the market will recover so that they can recoup their losses. “Depending on what the final outcome will be, the latest legislation can be characterized as either ‘bail out’ bill or a ‘buyout’ bill. The vast majority of homeowners should continue to be both willing and able to make their payments; this means that many of the mortgage backed assets the government will be purchasing from financial institutions during the few months will eventually have equal or greater value than they do today. Realize that part of the problem is fear itself. Investors have panicked and the prices of many mortgage backed securities have fallen, some even below their true values,” Payne said. When asked how long it will take the financial sector to recover and for the bail out legislation to show some affect, Payne said only time will tell. Trentham said he is unsure if the piece of legislation will actually prevent a recession for the country. A new plan is in the works by federal legislators in the form of a second economic stimulus payment to taxpayers. Federal Reserve Chairman Ben Bernanke has been cited in mainstream news outlets as recommending a second payment to Americans “that would stimulate the economy and help us pull out of this downturn faster.” A federal package would require a special session after the Nov. 4 elections.

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