October 1, 2008

Purdue professor says new federal bailout plan needed soon

WEST LAFAYETTE, Ind. - A Purdue University economics professor says congressional leaders should get back to the drawing board after the failure of a proposed $700 billion federal bailout of Wall Street.

"Lawmakers need to find common ground on a proposal that they can pass quickly," David Hummels says. "If they are not going to support any type of plan, they should make it clear that intervention is off the table. The worst thing that can happen at this point is a longer period of indecision."

Hummels and Philip Abbott, a Purdue professor of agricultural economics, and Krannert School of Management Dean Richard Cosier took part in a congressional conference call on Friday (Sept. 26) with the University of Notre Dame and Ball State and Indiana universities. Indiana representatives Steve Buyer, Baron Hill, Mike Pence, Dan Burton and Mark Souder arranged the call to gather input on the now-defunct bailout plan.

The $700 billion emergency package for the nation's financial systems failed to pass the House of Representatives by a vote of 228-205 on Monday (Sept. 29). President George W. Bush and top financial advisers are calling for a compromise to be ready for a new vote Wednesday night (Oct. 1).

Further inaction or no action could have dire consequences for the American economy, Hummels says. Nationwide, a credit freeze from banks shaken by the economic situation could mean business declines and job losses.

"Many, many people are looking at all of this as a lifeline for greedy investors without clearly understanding how it affects them," Hummels says. "When banks are too burdened by bad mortgage debt, or too frightened by these conditions to loosen their clutches on credit, businesses falter. Without liquidity in credit, businesses can't continue their normal operations, such as buying and paying for their supplies or meeting payrolls. When they can't meet these obligations, businesses are forced into layoffs or bankruptcy. Americans lose their jobs."

Continued inaction also could lead to a large decline in the value of the dollar, further uncertainty in world markets that have invested heavily in the United States and a deep recession. Job cuts would likely force consumers to further cut back on spending, which would exacerbate the length and severity of a recession, Hummels says.

"One of the biggest concerns is how this kind of failure makes us look to foreign investors," he says. "Our country borrows between 700 billion and 800 billion dollars a year from abroad. If those investors fear that our private capital markets will be unable to repay those debts, they will ask for a premium on future loans in the form of higher interest rates. The costs of securing financial backing from abroad could quickly become prohibitive."

While doing so may feel unnatural to Americans far removed from Wall Street, Hummels says lawmakers and the public should listen to U.S. Treasury and Federal Reserve experts.

"Ben Bernanke, chairman of the Federal Reserve, is one of the foremost scholars on the causes and consequences of the Great Depression," Hummels says. "He knows more about this particular issue than anyone else. If he says the situation is dire, it is."  

Writer: Tanya Brown, (765) 494-2079, tanyabrown@purdue.edu

Source: David Hummels, (765) 494-4495, hummelsd@purdue.edu

Purdue News Service: (765) 494-2096; purduenews@purdue.edu

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