Will bailout help Valley?

McALLEN - An expensive and unprecedented economic recovery plan is drawing the ire of Rio Grande Valley residents who have inundated their lawmakers with phone calls expressing disapproval.

Dozens of locals have urged lawmakers not to pass a $700 billion bailout to rescue banks saddled by shaky mortgage assets despite dire warnings from the Bush administration that failing to act quickly would only deepen the crisis and cripple the nation's, and consequently the world's, economy.

"A lot of people are calling in and a lot of people are saying protect the average person," said Danny Guerra, a spokesman for Rep. Solomon Ortiz, D-Corpus Christi. "(They're saying) don't give the government some sort of big check, so we're getting a lot of concerns about it."

The unprecedented plan to stabilize the tumultuous stock market also drew the ire of lawmakers from both parties who said they are reluctant to bail out Wall Street from problems it created without adequate safeguards that the crises wouldn't happen again.

"Honestly, I would say about 30 (calls) a day right now," said Liz Chavez, an official with Rep. Henry Cuellar D-Laredo. "It's understandable, they're frustrated."

However, Texas lawmakers have remained recalcitrant about expressing their thoughts on the legislation which is designed to give the U.S. Treasury what amounts to blank check to purchase the bad mortgage debt from teetering banks and later sell it back into the nation's financial markets.

Sen. John Cornyn, R-Texas, said in a press release earlier this week that the American taxpayer will be his first consideration when approaching the bill, but offered few specifics as to what that actually means.

The cost of the scheme is unknown - the $700 billion figure is only an estimate. Furthermore, what exactly will happen for the average American if the bailout is or isn't passed is rather nebulous and subject to some debate.

The Federal Reserve chairman Ben S. Bernanke warned Congress Wednesday that high levels of uncertainty are hampering the economy beyond the housing market where much of the country's economic troubles began.

That unpredictability is making banks reluctant to extend credit, which consequently could stop business growth, increase unemployment and begin an economic downward spiral.

A Javier Rodriguez, president and CEO of McAllen-based Lone Star National Bank, said that entire economy operates on the premise of extending credit and when it's not there, the entire country will suffer consequences.

"It's very difficult to lend money under those circumstances," Rodriguez said. "We have more unemployment now; the threat of inflation is still there. The value of financial instruments is more volatile. So all those things have affected us directly."

However, what has not burdened Rodriguez's bank is the subprime-lending crises that precipitated the turmoil and until recently had little effect locally.

During the real estate boom years, developers built too many homes while banks extended loans to people who otherwise couldn't afford a mortgage or people who wanted a bigger loan they would normally get.

Those loans were packaged as securities by banks who sold them to brokerage houses to generate capital on the premise that the loans were not risky. However, the loans were risky investments and the formula used to calculate the risks was outdated and unable to anticipate just how bad the debts really were.

Home prices then declined after years of rapid inflation, so people unable to afford the mortgages couldn't sell their homes to offset the losses. Quite simply, the supply of home exceeded demand and the prices fell. Eventually people began defaulting on those bad loans, causing grave losses for the larger firms.

Investors responded by selling off the firm's stock, perpetuating a problem that was already spiraling out of control, and sending many storied financial firms such as Lehman Brothers into bankruptcy.

However, the Valley largely avoided the crisis for years because the housing market remained strong despite the high-number of subprime loans extended to area residents. Recently, housing prices have fallen and foreclosure rates have begun rising.

Victor Valverde, an investment representative with Next Financial in McAllen, said this decline is perhaps the most visible aspect of the nation's economic woes locally.

The bailout will likely stabilize the economy and stave off a greater collapse that would ruin retirement plans, mutual funds, the real estate market and investments with brokerage houses, he said.

"The Fed (is) doing what they need to, to help prevent a major catastrophe," Valverde said. "Sure Wall Street created the problem ... (but) I do agree with the bailout."

Wednesday, lawmakers said it was becoming increasingly apparent that they would pass some form of a bailout, but the plan was still emerging. Democratic lawmakers won a key concession from the Bush administration when Treasury Secretary Henry Paulson agreed to limit the pay packages of Wall Street executives whose companies would benefit from the proposed bailout.

"The American people are angry about executive compensation and rightfully so," Paulson told the House Financial Services Committee. "We must find a way to address this in the legislation without undermining the effectiveness of the program."

Republicans have argued against federal intervention in private businesses and Democrats have pressed to tack on help for homeowners facing foreclosure.

Still, most lawmakers have agreed that something must be done and will be done soon.

THE LARGER QUESTIONS

The plan represents a drastic shift in American economic policy. Pundits and experts from both political parties cautioned against setting the precedent that the Federal government will intervene without letting the market correct itselff - as fervent capitalist and some conservatives argued it should.

"The Treasury's charter would turn every bank into the equivalent of the former Fannie Mae and Freddie Mac - a government sponsored (but now quiet government owned) enterprise," wrote Roger Lowenstein, in the normally liberal-leaning magazine The New Republic. "After a lifetime as a champion of free markets, Paulson should carefully explain why he no longer thinks they will (correct themselves.)"

Furthermore, the bail out represents a larger philosophical shift in American economic policy. When the government seizes control of a critical industry, others argued, its called socialism.

Donald Luskin, a contributing editor at the conservative magazine National Review, questioned the necessity of a bailout when the American economy has endured worse turmoil without such extensive intervention.

"We simply cannot know what unintended consequences might be unleashed in the process of a massive acquisition of mortgage assets by the federal government."

And yet there's one other aspect of the debate that has infuriated many. The deeply unpopular Bush administration will not be in office to deal with the outcome of what is shaping up to be another consequential choice for an administration that has fought two wars and reshaped American foreign policy.

THE CRISIS COMES HOME

HOW IT ALL STARTED

THE CONSEQUENCES OF THE PLAN