A bailout for the better? Or the worse?

Does everyone think that a bailout was the only way to go?

Jenny Wahl, economics professor, Carleton College: At first I thought Henry Paulson was channeling Chicken Little, but now I think he's really Foxy Loxy. The sky is falling, all this horrible stuff is going to happen. It doesn't prove to me just by saying so that it necessarily would have happened.

Jeanne Boeh, economics professor, Augsburg College: "It's not just the finance market; the world has come to an end! We're in the worst economic times since the Great Depression; Tom Joad is running around." That's what people are saying and that has caused part of the panic. When you say, "Wait a minute, unemployment is 6.1 percent, we have slow growth rates. Let's hold on here!"

James Paulsen, chief investment strategist, Wells Capital Management: Every crisis has two parts: debt and fear. I think this is much, much more of a fear-based crisis than almost any other that we've dealt with, and that's why the traditional medicines we applied to it, that we always applied at crisis -- interest rates and liquidity -- didn't work.

Finally in January we gave up on the traditional medicines, and created new ones, which I call confidence booster policies. And the one we're talking about in Congress right now is the mother of all confidence booster policies.

David Francis, head of equities, Thrivent Financial for Lutherans: You can't say everyone was making this up. Financial markets ground to a halt. I would argue that it's capital preservation; everybody is squirreling away capital so that they're not the next AIG or Lehman Brothers. There are good, solid assets here, but there's just not a good way to fund them. And that's real, that's not fear.

Boeh: One of my concerns I've been harping at is it's not the big guys, it's not the guys earning millions, it's the small business. As the credit squeeze goes down, what happens to the small business? Then it really is Main Street, now it's not Wall Street anymore. At this point, we have to do something.

Doug Ramsey, director of research, the Leuthold Group: I'd like to see some of these institutions fail. This entire financial sector in the U.S. right now -- because of how big its asset side of the balance sheet grew -- is undercapitalized. But there's overcapacity. The market was in the process of destroying a lot of capacity. Somehow I don't want to circumvent that market mechanism. I'd love to see some significant failures that take lending capacity and investment banking capacity out of the system.

Francis: People keep saying banks aren't failing. Bear Stearns is vaporized. Lehman Brothers is vaporized. Fannie Mae and Freddie Mac are vaporized. For the private shareholder, there were billions and billions of dollars of wealth destroyed here, right?

Bill Melton, retired economist: Obviously we made mistakes -- when I say "we" I mean everybody. The whole spirit of the times was to not have regulation because markets could do it better. Well, we now know better than that. All of these financial instruments had a common feature -- namely, I don't want to put any capital on the table. So if it's going to be a hit, I win, and if it doesn't work, somebody else is going to pick up the pieces. I think we need to form a consensus in this country, that that was not a good way to go. We need to have a consensus about what was done wrong, and we need to have a consensus about how we're going to fix it, to keep it from happening in the future. I don't see that consensus anywhere.

Tom Stinson, Minnesota state economist: One of the problems we have now is that, if you're going to do something, we have to have somebody use up some political capital at the highest level. And there isn't any.

Is there anything you can say to the reader about how a bailout package would affect them and what it's going to ultimately cost taxpayers?

Francis: It makes [mortgages] easier to get and less expensive. Since they bailed out Fannie Mae and Freddie Mac, mortgage rates have come down again 50 basis points or something like that. That's the functional equivalent of the value of your house going up.

Boeh: It's not clear how much they're going to pay. The issue is things aren't selling right now. But if we give time for things to settle, it may be that we're not actually going to need to spend $700 billion.

Paulsen: It's very difficult to support [the bailout] from a political perspective but the bottom line is, if you're saying you might bail out a few mortgages here and there, or you might save the entire free world of capitalism, which way would you rather go? And which one might have more cost? What's in it for them is that if we don't save this system, a few people under the water on their mortgages will be the least of our worries on Main Street.

Stinson: I think that Federal Reserve Chairman Ben Bernanke has looked at things and said the expected value of the externalities [such as unemployment or further loss of housing prices] is so great that you've got to do something.

Francis: We are a world that lives on credit. If you wipe out credit, then you wipe out the ability of asset prices to be sustained.

Paul Anton, chief economist, Wilder Research: So [without a bailout] your stocks and your mutual funds will go down a lot.

Paulsen: That's not the worst. The worst is, you won't have a job, and there won't be a job for your kids.

Francis: This isn't a whole lot different than Japan in the late 1980s. I mean they got incredibly overvalued assets, they destroyed their banking system, and they never solved the problem, they just kept pushing it off year after year after year.

Ramsey: The $700 billion [price tag], even if that is the ultimate cost, even that is 5 percent of gross domestic product. I was just reading a World Bank study on banking panics and bailouts, and the median across 40 examples is like a 13 percent cost of GDP for a bailout. So this really is nothing.

Boeh: If you're a regular homeowner, the world, in some ways, has ended. You can't expect your house to be your main retirement plan. Think of houses as consumption, not just investment. The same is true for the stock market. We're going to go back to much lower growth than what we've been used to, so unfortunately we're going to have to go back to the ways of earlier generations.

Jim Paulsen, you're an optimist. Do you believe we're going to see slower growth in the stock market going forward?

Paulsen: Well, not quite. I like the odds that we'll come out of this, and if we do, I think stocks will roar for a period of time. Because of the fact that we've built up so much buying power, and what we lack is confidence. You've got three major things going for you as a stock investor right now. 1. You've got the restoration of value, the median price company earnings is below 14 times earnings in the Standard & Poor's 500 right now -- the lowest since 1990. We've spent a decade revaluing values in the stock market. 2. You've got sheer fear, which is always a good thing. Hearty souls are the only ones left and a lot of excess buying power is on the sidelines waiting for the Great Depression; if it doesn't happen, [the money] comes back in. 3. You've got every policy official, almost all over the globe, working 24/7 with one goal in mind: They're myopically focused on how to increase your stock portfolio. Everything we're talking about in Congress is aimed at trying to get the stock market to go up, because if they can get the stock market up, the economy will follow.

Ramsey: I'm not that bullish, but I do think you should be at an above-average risk profile in terms of stocks. I can't tell you the number of associates I have in the business that have said in the last week, "This is the absolute scariest moment I've lived through in the investment business." As a contrarian, to me that ought to raise up some tentacles. I'm probably willing to let the market go up another thousand points on the Dow, to assure me that we've skirted this thing, and get in a little bit late.

How long until we feel the effects of a bailout, and what will they be?

Anton: More of the benefit is not that your life will get better over the next few months, but that your life will stay closer to the same, and it would have gotten worse had this not been done.

Francis: I had dinner the other day with a teacher. And I'm talking about all this stuff at the end of the day, and she's looking at me like I'm from the moon. What she's worried about is gasoline is $3.90 a gallon, milk's $4 per gallon, bread's $3 a loaf. I think if you start to see some of that stuff change in conjunction with a little bit of stability in the financial markets -- it doesn't necessarily have to go up, it needs to stop being talked about all day.

Paulsen: We're either going to feel pretty good again very quickly, or we're going to be a hell of a lot more scared than we are at this moment -- within a matter of weeks.

The average Joe is also worried about taxes. What's the state's skin in the game here?

Stinson: Minnesota is part of the U.S. economy. The state's revenue depends on how well the state's economy is doing, and if the U.S. economy goes into the tank, things are going to be worse for the state, as well. I think by the first of the year, forecasts are going to reflect that. But the forecasts we are going to have in November are going to be very uncertain because we aren't going to know if things are actually going to take off or not. I think this is going to get passed. If it doesn't get passed and Congress just walks away as opposed to saying we're going to come back later, I think that's a recipe for serious problems.

This Q&A was edited for length and clarity.

kmcguire@startribune.com • 612-673-7293

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