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Crisis is real: If we do nothing, shopping slows, workers get fired

Updated: May 3, 2013 12:14PM

The whole world is watching America, and we need to remember that this is the ultimate reality show -- with real and potentially disastrous consequences.

You don't have to believe the politicians. They've cried "wolf" too many times, and have a history of turning big problems into expensive catastrophes while they grab power.

But the global markets are speaking decisively about the critical financial situation. The interest rate that banks pay to borrow from other financial institutions has soared. No bank trusts that the other will be able to repay the loan.

The "run on the bank" of 1930s-era movies, with people lined up outside the doors, has been replaced by instant digital drawdowns via the computerized wire transfer system as big institutions react to rumors of the next insolvency.

Money has flooded into the perceived safety of short-term U.S. Treasury bills, leaving banks without liquidity. The impact on business is immediate -- and close to home. Without government action, the reality will soon be apparent.

When the retail store can't get credit to buy holiday merchandise, the manufacturer loses orders, and both businesses fire employees. And even if consumers were willing to shop, many of their banks have already cut credit card limits in half.

Without global liquidity, every business transaction -- large and small -- grinds to a halt.

It's unfortunate that all aspects of the proposed solution have been lumped under the pejorative term "bailout." Americans have been the most generous people in history -- from the Marshall Plan, which rebuilt Europe, to more recent reactions to natural disasters. We've always recognized that it's in our long-term interest to keep the global economy growing. How amazing that we could consider turning against our own country.

There are no guarantees that this plan will work -- only the certainty that the consequences will be huge if Congress fails to act. And if Congress does act, risk remains.

The immediate issue is how to price the loans the government takes over, how much money to pay the banks for them. Paying too little won't solve the problem; paying too much makes taxpayers the big losers.

Then there is the task of managing those loans, sorting out which to foreclose and which are likely to pay, and which might be renegotiated.

Finally, there is the balancing act: to restore confidence and restart the economy, but not engender another speculative boom.

The great hope is that this strategy creates confidence to get the global economy going again. When home prices stabilize, people will continue to pay on their mortgages. That money then goes into the Treasury to offset the money spent. In fact, the Treasury could wind up actually making money on the deal -- years down the road!

Don't begrudge the Treasury the possibility of making a profit. Let's just hope it does -- and then get out of the business.

Free markets may go to extremes -- though no one complained they were making too much money when home prices were rising! Now we're headed toward the opposite extreme -- of falling prices and recession. It's time to act -- responsibly. And that's The Savage Truth!

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd.

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