President Bush has issued a warning to Congress: act now on a financial rescue plan or the economy could face “painful and lasting” damage. In brief remarks at the White House this morning, Bush pledged that his administration will work with Congressional leaders to get the defeated $700 billion relief package back on track, saying “this is not the end of the legislative process.” While conceding the proposal is huge, he noted that it was dwarfed by the trillion dollars lost in this week’s stock-market plunge. He said that “will have a direct impact on retirement accounts, pension funds and personal savings” of millions of Americans. He also said the actual cost to the taxpayers should end up much less, arguing that once markets recover, the assets the government buys likely will gain value. While acknowledging it’s “a difficult vote for members of Congress,” Bush called the situation “urgent,” saying the consequences of inaction “will grow worse each day.”
Congressional leaders are trying to come up with enough changes in the administration’s $700 billion financial rescue plan to persuade members who voted against it Thursday to change their minds and sign on. Congressional leaders need to attract about a dozen votes to avoid another defeat. Senate Republican Leader Mitch McConnell says it’s time lawmakers “act like grownups” and “get this done for all of the people.” Both John McCain and Barack Obama are suggesting adding an increase in the Federal Deposit Insurance limit to $250,000 as a way of boosting confidence in the banking system. Republican House aides say that might appeal to some conservatives who want to help small business owners and avoid runs on banks. Another possible change would modify accounting rules that require banks and other financial institutions to adjust the value of their assets to reflect current market prices even if they plan to hold onto them for years. Some House Republicans say the rules have forced banks to report huge paper losses on mortgage-backed securities which might have been avoided. Republican Congresswoman Marsha Blackburn of Tennessee, who voted against it, says she still believes Republicans and Democrats can come together. She tells CBS’s “The Early Show” that something positive could happen by the weekend. Democratic Congressman James Moran of Virginia blamed Republicans for the bill’s failure, saying the Democrats “`were willing to hold the vote open” so that people could change their minds. When asked about scores of Democrats who also voted no, Moran replied that the Democratic caucus did not want to “own this bill.” Republican Tom Price of Georgia, who voted against the bailout, says he thinks “it’s important to get this vote right,” and protect taxpayers. He spoke on NBC’s “Today” show.
Economist Ray Perryman says effective policy can allow markets the freedom to do the things they do well and restrain greed, but not stifle the creativity and innovation needed to promote growth. Perryman says it’s important that Congress comes up with a bill.
“Because of the situation of the financial markets now we absolutely have to do something. We have to bring some liquidity to the system, and as much as people view it as a bailout of Wall Street or whatever the case may be, the reality is that right now there is no liquidity in the banking system and that’s absolutely essential. We have to have liquidity for small business to function, for consumers to function, for our economy to do what it needs to do. It’s going to affect everyone of us in our daily lives. Unless we get something—and I’m confident we will get something done—because the elected officials are in a very difficult situation, but nonetheless it’s a situation where we have to address it and address it soon.”
Perryman says the financial crisis got more of America’s attention with the record stock market drop on Monday.
“I think prior to yesterday a lot of the calls to the Congressmen were running very strongly against it, some of the polls were running very strong against it. But I think once they saw the stock market reaction yesterday and some of the analysts really taking a good hard look at the implications over the evening, I think people are beginning to let it sink in that this really is something that’s important. Nobody likes it—there’s not a single person up there who likes it. But given the situation we’re in, it’s just something we have to do.”
As Congressional leaders work on revisions to the $700 billion bailout of the financial system, some members are reporting a shift in the calls coming into their offices. Before the House vote and the stock market plunge it triggered, many offices were reporting that constituents were expressing overwhelming opposition to the rescue plan. Since then, the anger has shifted to Congress’ lack of action to end the financial turmoil. California Republican John Campbell voted for the bill. He says calls had been 8-to-1 against, before the vote. Now he says constituents are telling him things like: “I lost ten percent of my retirement.” Congressional leaders need to pick up about a dozen votes. Among the changes they are considering are extending unemployment insurance and a ban on some forms of short selling. Others included upping the limit on federal deposit insurance and changing some accounting rules that force banks to report huge paper losses.
There’s disappointment in Europe over the failure of the U.S. bank bailout bill. The European Commission urged Washington to show “statesmanship” in the crisis. An EU statement says Washington has a “special responsibility” toward the global economy. An EU Commission spokesman says the 27-country EU was disappointed the U.S. House of Representatives rejected the rescue package for the financial markets. He says a reworked version should be approved swiftly. German Chancellor Angela Merkel says the quick passage of a rescue package is “the precondition for creating new confidence on the markets.”
The collapse of a bailout plan in Congress has Asia shaking. Australia’s prime minister calls it “a bad development.” The Bank of Japan pumped three trillion yen, or almost $29 billion, into money markets as part of the coordinated effort of the world’s central banks to boost liquidity and bolster lending. Japan says the U.S. crisis has a major global impact. Hong Kong’s de facto central bank is calling for calm, while signaling it’s also willing to inject liquidity into the markets if necessary. So far, few Asian financial companies have been hurt badly by the credit crisis, though the fallout could spread. A recession in the U.S. would batter Asia’s export-oriented economies.
Trading on Russia’s two major stock exchanges has been halted on order of the federal market regulating agency. The ruble-denominated MICEX Exchange said in a brief statement that the Federal Financial Market Service ordered it to suspend trading until two hours after its usual opening. The dollar-denominated RTS said only that details on when it would resume trading would be announced later. Russia’s stock market, which earlier this year had been one of the world’s most robust and lucrative, has been in a steep decline for weeks, reflecting not only the turmoil in international markets but fears sparked by Russia’s August war with Georgia.
Mexico’s treasury secretary says the current financial crisis will “undoubtedly” affect Latin America, reducing demand for the commodity exports that have fueled the region’s recent boom. Secretary Agustin Carstens says continued volatility will deflate oil and other commodity prices, boosting investment risk. He says Latin American countries must continue pushing structural changes to drive internal growth. Carstens lowered his annual growth forecast for Mexico to 2.5 per cent this month. But he told reporters that Mexico is well-positioned to weather hard times, in part by boosting public spending. The U.S. slowdown is slashing remittances, tourism and exports from Mexico–80 per cent of which go to the U.S.
Venezuelan President Hugo Chavez is calling the U.S. financial crisis a failure of free-market capitalism. Chavez also says the so-called Washington consensus polices promoted by the U.S. have “collapsed” and that economies worldwide could be harmed if the crisis causes commodity prices to fall. Chavez likens the effect internationally to “a hundred hurricanes.” But he says Venezuela’s economy remains on good footing despite its dependence on U.S. oil sales. Chavez spoke to reporters Tuesday on arrival in Brazil for a summit with the presidents of Brazil, Bolivia and Ecuador.
The agency that protects U.S. bank deposits is asking Congress for temporary authority to boost deposit insurance limits as the government works to contain the financial crisis. Federal Deposit Insurance Corporation Chairwoman Sheila Bair asked for unspecified authority to raise insurance limits on the very day that both presidential candidates recommended the move as a way to help prospects for the failed $700 billion financial bailout bill. Bair said the overwhelming majority of banks remain sound but that an increase in the cap would help ease the crisis of confidence in the banking system. Earlier Tuesday, Senators John McCain and Barack Obama pushed the idea of an increase in the insurance limit to $250,000.
Banks are moving into miser mode, charging each other more to borrow. After Congress’ rejection of the administration’s financial rescue plan, a key bank-to-bank lending rate known as the London Interbank-offered rate jumped to 4.05 per cent from 3.88 per cent for three-month dollar loans. The rate for overnight loans rose to 6.88 per cent. Central banks around the world have been boosting their lending in an effort to keep the markets functional. The Federal Reserve said it was doubling the amount of cash loans to banks and making more available to central banks in other nations, but it’s had little effect. Meanwhile, the demand for treasury bills remains high. As stocks plummeted, investors funneled their money into the short-term debt instruments issued by the government. Treasury bills are considered the safest investment available.
The seize-up in the credit market is hitting the auto industry. Automaker reports on September sales numbers are expected to reflect the negative impact of the lack of credit availability. AutoNation CEO Mike Jackson says tougher credit requirements from banks and finance companies and limits on money to fund leases have cost his chain 20 per cent of its sales volume this year. The nation’s largest Chevrolet dealer has filed for bankruptcy protection. Georgia-based Bill Heard Enterprises cites a “perfect storm” of the credit crunch, soaring gas prices and declining demand for big vehicles. Through August, U.S. auto sales were down 11 per cent compared to the same period a year earlier. Dealers say those with lower credit scores have been pushed out of the market by banks and automakers’ finance companies.
A closely watched index shows home prices tumbling by the sharpest annual rate ever in July, but the rate of decline is slowing. The Standard & Poor’s/Case-Shiller 20-city housing index fell a record 16.3 per cent in July from the year-ago period, the largest drop since its inception in 2000. The ten-city index plunged 17.5 per cent, its biggest decline in its 21-year history. Home values in all 20 cities fell year-over-year, with Las Vegas prices plunging the most at nearly 30 per cent. However, the pace of declines has slowed over the last three months, but there is still no sign of a bottom, one of the index creators said.
A private research group says Americans’ confidence in the economy unexpectedly improved in September. The reading still hovers near an historic 16-year low and does not fully reflect the financial meltdown that has rocked both Wall Street and Main Street in recent days, however. The Conference Board said its consumer confidence index is at 59.8, up from a revised 58.5 in August. Economists surveyed by Thomson/IFR expected a reading of 55.5. The level remains about half of what it was a year ago and near the lowest since the index registered 54.6 in October 1992 when the economy was coming out of a recession.
An “Economic 9/11” could lie ahead thanks to the vote against a bailout package for the U.S. financial system. That’s the warning from Terry Connelly, dean of Golden Gate University’s Ageno School of Business. The House’s stunning defeat of a $700 billion package urgently championed by President Bush sent shock waves through Capitol Hill, the trading floors on Wall Street and the Oval Office. Experts say the economic train wreck might not happen right away and one economist says it’s like a doctor telling a patient to quit smoking. In the words of Robert Brusca of Opinion Economics in New York, “you know he’s right. But if you don’t, you’re not going to die tomorrow and you’re not going to die next week. But at some time, it’s probably going to get you.”
If the $700 billion price tag attached to the bailout plan that failed sounds like a lot–well, it is. You can spend $700 billion in a lot of different ways. For instance, you could buy a war–the U.S. has spent $648 billion on the war in Iraq so far. That much money could ensure universal health care coverage for six years or upgrade the country’s most deficient bridges four times over. Or you could build 1,750 bridges to nowhere. With $700 billion you could run Denmark, which had a gross domestic product of $312 billion last year. That much money could also pay back every single outstanding student loan, fund the national intelligence budget beyond 2020, or help the Gulf Coast recover from five Hurricane Katrinas.
Entergy Corporation estimates that damage from Hurricanes Ike and Gustav cost the power provider $1 billion to $1.2 billion. Of Entergy’s six regulated power utilities, Entergy Texas took the most damage during Ike–an estimated $435 million to $510 million. Entergy says that storm cost a total ranging from $525 million to $625 million. Earlier, Entergy estimated the cost of repairs and restoring electricity following Gustav to range from $500 million to $600 million. New Orleans-based Entergy also says it expects a yet-to-be determined drop in utility revenue because of the storm outages.
Motorists in parts of the southeast are starved for gasoline. A hurricane-induced gasoline shortage that was expected to last only a few days is dragging into its third week, and experts say it could persist into mid-October. The Atlanta area has been hit particularly hard, along with Nashville and western North Carolina. Those lucky enough to find gas are paying more for it than drivers elsewhere. The shortage started with Hurricanes Gustav and Ike, which shut down refineries along the Gulf Coast. Many refineries are still making fuel at reduced levels. The southeast relies heavily on two pipelines from the Gulf Coast. Because the gasoline moves slowly, it can take up to ten days to reach Atlanta. Panicky drivers in the hardest-hit areas often top off their tanks every time they pass an open station. And that’s made matters worse. One gas station in downtown Atlanta had police officers and a security guard on duty.
The Federal Trade Commission has approved the $2 billion acquisition of Houston-based Grey Wolf by Canada-based Precision Drilling Trust. Precision will retain its Calgary, Alberta, headquarters, but will use Houston as its base for U.S. operations.
Brazil’s state-run oil company has made two more offshore oil discoveries in the Atlantic Ocean. Petrobras says the oil is in the Santos basin, where it owns the entire block. It also announced a find in the Camamu-Almada basin, where it has a 45 per cent stake, partnering with Queiroz Galvao, El Paso and Petroserv. Petrobras didn’t say how many barrels of oil the new discoveries might hold. Brazil has made several major offshore oil discoveries in the past year, which promise to transform the country in an oil superpower.
Officials with Texas-based Vought Aircraft Industries said production continued at its Nashville plant while union members picketed outside. Plant spokeswoman Lynne Warne said the company was bringing in 250 contract workers this week and had reassigned 200 salaried employees to the plant floor. About 1,000 members of the International Association of Machinists and Aerospace Workers walked off the job Sunday after voting down a contract proposal over pension and health care issues. Union Local 735 spokesman Bob Wood told the Tennessean striking workers doubt the plant can meet demand for wing and tail assemblies.
Texas A&M University has sweetened its offer of free tuition for middle-income families. The university says this year’s freshmen from families with incomes of $60,000 or less will be eligible for free tuition. That’s up from the limit of $40,000 in another program. Eligible students must be Texas residents entering Texas A&M as freshmen. They can take part in the “Aggie assurance” program for up to four years. A grade point average of at least 2.5 is required as well. The estimated cost for in-state students to attend Texas A&M is $19,950. About $7,780 of that consists of tuition and fees. Students in the program also would be eligible for additional grants, loans or work study programs to cover fees, books, room and board. Texas A&M estimates about 80 per cent of its students receive some type of financial aid.
Oilfield services provider Schlumberger says disruptions from back-to-back hurricanes in the Gulf of Mexico in the past six weeks will have a negative impact on third-quarter earnings. At the start of an investor conference in Houston, Schlumberger Chairman and Chief Executive Andrew Gould said Hurricanes Gustav and Ike are expected to reduce results for the July-September period. Gould said the primary cause was the loss of 22 operating days in the Gulf of Mexico, where the company provides technology, equipment and other services to help oil and gas companies find and tap new sources of fossil fuels.