President and Chief Executive Officer, Farr Miller and Washington, LLC, Author , 'A Million Is Not Enough: How to Retire With the Money You'll Need' and CNBC Contributor
Friday, October 3, 2008 3:15 PM
In a dramatic reversal, the House today approved by a comfortable margin a $700 billion financial rescue package that will bring the greatest intervention of the federal government into the private marketplace since the Great Depression, attempting to prevent the economy from sliding into a deep recession.
Investment counselor, author and CNBC contributor Michael Farr was online Friday, Oct. 3, at 3:15 p.m. ET to discuss the passage and what it means for the economy.
A transcript follows.
Washington, D.C.: Will the bailout work and fix the economy and credit? How long will it all take? Are we still headed for a recession?
Michael Farr: I think that bailout will work at least initially. Short-term cash markets for trading between banks, that include money market instruments, have essentially stopped trading. No one is buying. The Discount Window at the Federal Reserve has been providing huge amounts of cash for the past several days to keep the doors of several financial institutions open So this bill should back-stop some of the doubt that clouds these markets.
Will it work longer term is a key question. It will if there is proper oversight. Some immediate action was required no matter what, but the question is that now that we have a whole lot of money to throw at the problem, where and how do youthrow it?
I will judge ongoing success by three measures: mortgage lending should resume and increase, credit spreads (the difference in yield between treasury bonds and corporate bonds, like General Electric bonds) will narrow, and the dollar will continue to strengthen.
Will it fix the economy? Not by a long shot. The economic cycle is in contraction and will likely endure another 6-12 months of downward figures and rising unemployment.
We could see this enormous ship begin to turn a year or so from now, but the purpose of this bailout was to patch a very dangerous hole in the boat itself.
Yes, we're still headed for recession.
Baltimore, Md.: Now that the package has been passed by Congress and signed by the president, what kind of time frame are we looking at as to when the funds will start going into the system? I guess a simpler (or alternative) way of asking is, when do you expect that the first batch of toxic assets will be bought by the government?
Michael Farr: I'm not sure, but I'm hearing that it will take at least two to three weeks.
Chantilly, Va.: What will be the effect of the passage of the bill have on the average consumer?
Michael Farr: I hope that the average consumer will be able to refinance his house and get a car loan. If you're not looking to refinance, then perhaps you will be able to get a loan to buy your first home.
Arlington, Va.: Is this rescue plan a panacea?
Michael Farr: Not at all. Seven hundred billion dollars can solve a lot of problems. But without seeing the details of the bill, we don't know the cost of the congressional pork nor do we know the cost to those companies requiring these funds.
Alexandria, Va.: How can we prevent what happened from happening again? Are these lawmakers learning a lesson? Is Wall Street? Who's fault was all this?
Michael Farr: I think there is enough blame to go around. There is clearly not enough effective regulation in place to prevents banks and investment banks from making bad loans and taking on too much debt. I also believe that credit conditions were too easy and the Federal Reserve kept interest rates way too low for too long. The combination of low interest rates, lack of regulation and speculative mania were the causes of this situation.
Washington, D.C.: How close are we do a recession/depression?
Michael Farr: I think we are in a recession. I think we have been in a recession for the last several months. The best evidence of that is the monthly employment reports which continue to show job losses across the economy. I think that the federal government's response will determine the length of the recession. If this current plan is effective to returning liquidity to the credit markets, perhaps we can avoid a protractive recession.
Fairfax, Va.: With 25-30 years til we hit the retirement age, my wife and I, while we lament the losses in our 401k and IRA's, are happy to be buying more shares each month. Are we drinking the Kool-Aid on this and instead be moving money out?
Michael Farr: You are doing exactly the right thing. The best way to think about it is down markets allow you to buy more shares of the funds that are in your 401k. In 2000, the Dow peaked around 11,100. In 2003, the Dow went down to about 7,700. On October 1, 2007, the Dow traded at 14,200. These dramatic cycles are a very uncomfortable part of investing. This too will pass. It will take a while. We will see 15,000 and even 20,000 long before you retire.
College Park, Md.: Is this all Alan Greenspan's fault?
Michael Farr: Alan Greeenspan bears a large part of the responsibility for this current mess. He kept rates too low for too long and as a result, mortgage money was cheap and housing prices soared.
Syracuse, N.Y.: In the version of the bailout bill that just passed, there was a "sweetener" to alleviate the AMT on individual taxpayers. Is this the same as the AMT patch that Congress enacted (late) for the 2007 tax year?
Michael Farr: As far as we know, yes. The details of the plan are not out, but people earning less than $200,000 a year, should no longer be subject to AMT.
Washington, D.C.: Will this $700 billion have to be paid back to the government and how long is the loan for? Can we afford all this debt?
Michael Farr: Good questions. The $700 billion isn't really a loan. The $700 billion will be used by the government to purchase assets from troubled banks. If done correctly, the value of these assets purchased should rise over time, making the tax payer whole. The government will be increasing its debt level to fund these purchases. No, we can't really afford to do this but then at this point, we probably can't afford not to do it because the credit markets are completely frozen.
Washington, D.C.: So I don't have to worry now about going to my ATM and getting money out of my bank account?
Michael Farr: No, you shouldn't have to worry about this.
Bethesda, Md.: How is the average American's confidence going to restored? This has been a real scare and many people don't trust the government, the banks or Wall Street.
Michael Farr: It will probably take a long time. The first step to improve confidence is to get the credit markets operating again. The package passed today is designed to do just this. If this package is successful, it should go a long ways towards increasing the American public's confidence in government. If the government makes money on this plan and figures out a way to give it back to the taxpayer, that would improve confidence. Confidence in Wall Street again will probably only come again through the passage of time!
Washington, D.C.: Who is going to administer all this cash? Will Treasury hire Warren Buffett?
Michael Farr: The details have not been fully passed on to the public at this time. I believe that Bill Gross, who manages bonds for Pimco, has volunteered his time to help out with this endeavor. Warren Buffett said that he would be happy to help also. One problem with using guys like this to help with this program is that there will be many real, and perceived, conflicts of interest.
Concord, N.H.: I don't think credit, as it existed before, should be "fixed." The standards for getting a loan should be more stringent than they were -- I don't want this bailout to mark a return to the free-wheeling lending days. Open the channels up but don't expect or invite a flood.
Michael Farr: I agree completely. I don't think that we will see the a return to the free-wheeling lending days for many, many years to come. The bigger problem now, and what the bill is meant to address, is getting banks to lend at all!
Washington, D.C.: It may have patched a hole but the ships still sinking -- the bill fails to address inflation, energy costs which have doubled and tripled, job creation and crumbling infrastructure.
So this is life support for a broken system. How long can we put off fixing the above before we do this again?
Michael Farr: I think you are exactly right. This bill won't keep the economy from falling into a recession. We won't get out of this mess until housing prices have reached a bottom and real buyers begin to return to the market. I think this bill is designed to keep the credit markets operating, which reduces the chances that we go into a prolonged recession or a depression.
Michael Farr: Thank you very much. I really appreciate all of the great questions. If you would like my free weekly market commentary, please go to www.farrmiller.com to sign up. Have a great weekend.
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