A GMU professor's take on the bailout

As U.S. lawmakers appeared to near a final agreement on a $700 billion bailout to save the financial system, we turned to Stephen Fuller, director of the Center for Regional Analysis at George Mason University's School of Public Policy, with a few questions about what it this means to the average person. Here's what he had to say:

Who all does this buyout affect?

Everyone. This buyout is more than just saving Wall Street, it's to stabilize the entire financial system of the country. Even though the banks aren't part of this generally, they will be affected by it, some directly and others indirectly. Most importantly, consumers, whether they own stock or not, feel the anxiety or feel the fear that the uncertainty in the financial markets has generated. And that shows up in their spending patterns.

Anything that occurs, whether it's this exact plan or something different that has the affect of stabilizing Wall Street and building investor and consumer confidence, is what's necessary right now. Again, this bailout effort won't solve all of the problems, there are other problems in the financial system, but it may just give enough of a boost that people won't take all their money out of the banks and put it under their pillows. So it affects everybody.

How could it affect the average American?

It will help the economy from falling into a deep and long recession. So it helps us keep our jobs. Most Americans aren't threatened with job losses, but a few are and it will help us keep our income and our earnings and our way of life.

The economy is struggling to stay out of recession and a panic; much of what happens in a downturn is psychological. Everybody is tightening their belt a little and even if they haven't been affected at all directly they feel like oh, they have a little too much debt on their credit card and now would be a good time to mend their ways, but that means that they stop spending money. And if consumers who represent about two-thirds of the economy stop spending money, the economy contracts. So this is more about creating consumer and investor confidence so they will continue to behave economically as they have been in the past. Not quite as they have in the past, more carefully but not to lose confidence in the institutions of the economy. Your money is safe in the bank, it's insured up to $200,000, if the bank fails you're money is still there.

There is a diminishment of trust among the general population in the financial institutions even though a few of them are really only in trouble. So it becomes a contagion…everybody hides and nothing gets done. This could happen in the workplace where people start canceling their subscriptions and stop advertising and stop going out to dinner and that sort of stuff and all of a sudden there's massive layoffs in the businesses that are supported by consumer spending…. For a Wall Street stockbroker there's reason to worry, but for you and me we shouldn't be worried about this. We just have to wait it out. It's like a snowstorm -- it will pass.

What can people expect to see happen with their 401(k)s and other personal investments?

They've lost 15 percent or maybe more value [in 401(k)s] this year compared to last year. They'll get all of that next year, they won't get it back next week but the stock market will recover and will be back up as it did in 2001 after 9/11 and as it did in other recessions and periods of downturn in the economy. The stock market comes back and exceeds its past values and it will do that again. But it won't do it fast, without this bailout it wouldn't. Without the bailout you don't get your 401(k) values back to where they were a year ago and it's possible never. With this bailout or with this package, the stock market will begin behaving normally again over time and the value [will return to 401(k)s] if we just sit tight and don't panic.

A typical stockholder, when they panic, sells their stock just to get out of it, and they sell for less than they paid for it. The majority of individual investors get scared when the market starts slipping and they often sell at a loss. And the wise ones don't do that. Be patient; hold onto your stocks as they are. They were good buys a year ago and they're still a good buy today, generally.

What do you foresee happening with to the Washington metro area economy as a result of the buyout?

In the long run I don't see any negative impact one way or another with the buyout and the financial problems. It could potentially help us in that it could create more federal spending locally and more federal jobs, but I don't see that as a major event. We've had this happen a couple of times where we've had crises and there's been a little blip…I don't see it hurting us any more than any other place. Consumers here are pulling back, but we still have job growth. We have a stronger economy than other places right now so we should be able to weather this storm better. But we will feel the downdraft if it continues. Housing prices will continue to be soft and sales will soften up; they were just beginning to improve so I'm hopeful that we get over this pretty quickly.

The housing market is the part of the economy that has been most impacted so far…it was the problem. Prices went up too high, they weren't supported by the market place. And so the biggest impacts been on the housing market and the housing market will continue to feel the softness it's experiences over the last two years until the markets stabilize. And as soon as they stabilize, there are people who have deferred buying new houses and who want to buy a new house will go and buy. They'll feel it's safe to do that. So the primary [benefit] overall will be that the housing market will stabilize and the retail sector will be stronger. The retail sector is feeling the pinch right now, too. We've lost some jobs in the retail sector and holiday sales are projected to be softer than they would have been otherwise. This won't save the holiday season, but it will keep it from being a disaster. The timing is just quite critical in terms of keeping the economy from slipping into a deeper recession than it would have otherwise. It was projected to have a very weak fourth quarter and first quarter next year and what could make that projection a reality and make it much worse is if the stock market and the financial sector was allowed to continue to flail around and collapse as it was appearing to do last week.

-- Compiled by Elisa Glushefski