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Analysis: A primer on economic uncertainty
By MICHAEL REED
When Dr. Mahmoud Amin El-Gamal, chairman of the Rice economics department, is asked — as he has often been in recent days — “What’s is going on with our financial institutions?” he likes to begin his answer with an analogy of local origin.
“It’s a lot like in the 1980s when the flooding in Meyerland caused the price of all the houses in the area to go down,” he said, “even those houses that did not flood.”
El-Gamal said the same can be said of mortgage securities, many of which were “perfectly fine,” but had been grouped with debts that would likely continue to go unpaid.
“Because some instruments are bad, you can’t sell them,” he said. “It’s hard to decide on a fair price, hard to rely on past sales. The ramifications are pretty large, if banks no longer want to trade these assets.”
With most investors choosing to move toward safer investments, the reality of tight credit had begun curbing most Americans spending habits months ago, or forcing them to make many purchases on credit cards that have double-digit interest rates.
Still, while El-Gamal said a significant recession is likely locally, he added, “I don’t think Houston will be as hard-hit as it was in the mid-’80s.”
He said that is, in part, because while Houston is still “very much an oil town” and oil will likely take a big hit, the local economy has diversified significantly in the last 20 years.
El-Gamal said while the “ripple effects” from the financial downturn will be far-reaching, much will depend on success of any bailout measures that pass Congress.
“What he (Treasury Secretary Henry M. Paulson) is trying to accomplish is create enough confidence in the system,” the Baker Institute for Public Policy scholar said. “They don’t want the banks to have to sell assets at fire sale prices.”
He said because of the panic in the market, the assets are not selling at a reasonable rate. Once again, he uses real estate for comparison purposes.
“It’s like with houses,” he said. “If you have to sell this week, you have to discount the price.”
There is also a reason for what El-Gamal called the $700 billion “fat purse” as opposed to requesting funding in smaller, though still quite large, increments
“There’s the problem with confidence building,” he said. “If you pull out the big guns, then have to ask for more — coming back for money wrecks confidence building.
“He’s (Paulson’s) betting he can get a good deal for the American people — that Treasury has made the greatest investment ever.”
El-Gamal said much of the resistance to the bailout, beyond the staggering amount, comes from those who oppose the move for moral or, in some cases, philosophical reasons. Many of those object to a debt-based economic system or borrowing beyond our own means.
“Some say it is socialism — privatized profit and socialized loss,” he said.
“It’s a lot like in the 1980s when the flooding in Meyerland caused the price of all the houses in the area to go down,” he said, “even those houses that did not flood.”
El-Gamal said the same can be said of mortgage securities, many of which were “perfectly fine,” but had been grouped with debts that would likely continue to go unpaid.
“Because some instruments are bad, you can’t sell them,” he said. “It’s hard to decide on a fair price, hard to rely on past sales. The ramifications are pretty large, if banks no longer want to trade these assets.”
With most investors choosing to move toward safer investments, the reality of tight credit had begun curbing most Americans spending habits months ago, or forcing them to make many purchases on credit cards that have double-digit interest rates.
Still, while El-Gamal said a significant recession is likely locally, he added, “I don’t think Houston will be as hard-hit as it was in the mid-’80s.”
He said that is, in part, because while Houston is still “very much an oil town” and oil will likely take a big hit, the local economy has diversified significantly in the last 20 years.
El-Gamal said while the “ripple effects” from the financial downturn will be far-reaching, much will depend on success of any bailout measures that pass Congress.
“What he (Treasury Secretary Henry M. Paulson) is trying to accomplish is create enough confidence in the system,” the Baker Institute for Public Policy scholar said. “They don’t want the banks to have to sell assets at fire sale prices.”
He said because of the panic in the market, the assets are not selling at a reasonable rate. Once again, he uses real estate for comparison purposes.
“It’s like with houses,” he said. “If you have to sell this week, you have to discount the price.”
There is also a reason for what El-Gamal called the $700 billion “fat purse” as opposed to requesting funding in smaller, though still quite large, increments
“There’s the problem with confidence building,” he said. “If you pull out the big guns, then have to ask for more — coming back for money wrecks confidence building.
“He’s (Paulson’s) betting he can get a good deal for the American people — that Treasury has made the greatest investment ever.”
El-Gamal said much of the resistance to the bailout, beyond the staggering amount, comes from those who oppose the move for moral or, in some cases, philosophical reasons. Many of those object to a debt-based economic system or borrowing beyond our own means.
“Some say it is socialism — privatized profit and socialized loss,” he said.
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