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Only time will tell whether bailout plan can succeed, U. of I. expert says

9/22/2008

Jan Dennis, Business & Law Editor
217-333-0568; jdennis@illinois.edu

Fred Giertz
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University of Illinois photo
UI economist J. Fred Giertz says investors aren't sure yet how successful the government's recent bailout proposal will be in loosening up credit markets and propping up the sinking housing market.

CHAMPAIGN, Ill. — A historic government bailout proposal has slowed the bleeding on Wall Street, but the jury is still out on whether it can cure the nation’s troubled financial system, a University of Illinois economist says.

J. Fred Giertz says the government is banking that the proposed bailout will prop up sputtering financial markets, averting an implosion that could drag the overall U.S. economy into a potentially deep and costly recession.

“The bailout is an ad hoc response to complex and potentially dangerous problems in financial markets,” said Giertz, the interim head of the U. of I. economics department. “It appears to have stabilized the markets at least temporarily, but only time will tell if it provides long-term stability.”

Wall Street staged a broad rally Friday on news of the government plan to buy up $700 billion in bad mortgage loans that have been weighing down financial companies. But the market fell in early trading today as investors awaited further news about the rescue plan.

Giertz and other economic analysts say investors aren’t sure yet how successful the plan will be in loosening up credit markets and propping up the sinking housing market.

Critics of the massive bailout proposal are already lining up as President Bush and leading Democrats debate just how quickly Congress should pass legislation that commits taxpayers to the effort to shore up the nation’s struggling financial system.

Opponents question the fairness of the proposal, arguing that the government should not bail out firms that caused their own financial woes by extending credit to unqualified buyers.

“The bailout plan is not being carried out because the firms being helped are deserving,” said Giertz, a member of the university’s Institute of Government and Public Affairs. “In most cases, they are not. The intervention is to stabilize the financial system to avoid having the collapse severely impact the broader economy.”

Others contend the proposal is too selective, giving banks and financial institutions a break that likely would not be offered to other firms that found themselves in the same choppy financial waters.

“Many individuals and non-financial firms are unhappy with the bailout because they say the government would not help them in a similar circumstance,” Giertz said. “That is correct because their failure would not have broader implications.”

Editor’s note: To contact J. Fred Giertz, call 217-333-0120; e-mail jgiertz@illinois.edu.