GLOBAL SCENE

Bailout bill defeat could cause painful recession

The fallout from the vote against a bailout package for the U.S. financial system may well be lasting pain for the economy. The House’s stunning defeat of a $700 billion package urgently championed by President George W. Bush, sent shock waves through Capitol Hill, the trading floors on Wall Street and the White House on Monday.

“An economic 9/11,” warned Terry Connelly, dean of Golden Gate University’s Ageno School of Business, of the potential fallout. As the package went down, panicked investors caused the Dow Jones industrials to nosedive nearly 780 points in their largest one-day point drop ever.

Lawmakers defeated the legislation by a 228-205 vote, although Democratic and Republicans leaders and Treasury Secretary Henry Paulson all pledged to keep working for a package acceptable to all sides.

In the meantime, the economic wreckage that the administration and Congress have warned about - rising unemployment, shrinking retirement nest eggs and prolonged recession - might not happen immediately, but that doesn’t mean it won’t happen at all.

“This is like the advice you get from the doctor who says you should quit smoking,” said Robert Brusca, chief economist at Fact and 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.” For now, Treasury was expected to work with other government agencies, including the Federal Reserve and the Federal Deposit Insurance Corp., to deal with problems on a case-by-case basis. “Our tool kit is substantial but insufficient” without a bailout, Paulson warned.

There are some steps the Federal Reserve can take to cushion damage from the worst credit crisis since the Great Depression of the 1930s.

The Fed, which has been providing billions in short-term loans to help banks overcome credit stresses, could keep expanding those loans in an effort to spur financial institutions to lend more freely again. And, it could keep working with other central banks to inject billions into troubled financial markets overseas.

Also, the Fed could make it easier for banks and investment firms to draw emergency loans from the central bank by expanding the type of collateral they pledge to back those loans.

And, if the credit crisis were to turn even worse, the Fed also has the power in extreme circumstances to expand emergency lending to other types of companies and even to individuals if they are unable to secure adequate credit from other banking institutions.

The Fed also could do an about-face and start cutting its key interest rate again. The Fed in June halted an aggressive rate-cutting campaign and has kept its key rate since at 2 percent.

While some Fed officials doubt that another rate reduction would do much to boost confidence and persuade banks to begin lending again, Brian Bethune, economist at Global Insight, insists a deep cut would pack a powerful punch. It would lower the prime lending rate, now at 5 percent, that serves as a benchmark for credit card rates and many other types of loans.

Even if the bailout were enacted by Congress and actually worked, many predicted the economy will probably shrink in the final quarter of this year and in the first quarter of next year, meeting the classic definition of a recession. If Congress does not act, analysts, who were scrambling to downgrade their economic forecasts, believe those contractions will be deeper.

The unemployment rate - now at a five-year high of 6.1 percent - is expected to hit 7 or 7.5 percent by late 2009, which would be the highest since after the 1990-91 recession. Some economists say the jobless rate could rise even more.

“Undoubtedly, both businesses and consumers will run for cover.

They will clam up,” said economist Ken Mayland, president of ClearView Economics.

“The snowball hitting the economy will pick up speed and gather mass.” More banks could fail, too. In the second quarter that ended in June, the Federal Deposit Insurance Corp. estimated 117 banks and thrifts were in trouble, the most since 2003.

The threat of more banks failing in the U.S. and abroad forced the government to act swiftly.

The tanking stock market and falling home values - the single-biggest assets for most Americans - have taken big bites out of people’s wealth and their retirement accounts even as high energy and food prices are shrinking paychecks. Consumers are major shapers of the U.S. economy. If they retrench, the country will go into a tailspin.

The bailout plan was intended to revive jittery and fragile banks on Wall Street and Main Street by buying billions upon billions of their worst mortgage-related assets so that lending, the oxygen of the American economy, would flow freely again.

“People are going to go home and look at their 401(k)’s (retirement accounts) and not be very happy, and these are not just people from New York, but Iowa and everywhere else.

This bill is meant for everyone - not just Wall Street but Main Street,” said longtime New York Stock Exchange floor trader Theodore Weisberg.

Washington, AP

Bangladesh to introduce system to reduce mugging of mobile handsets

Bangladesh will introduce International Mobile Equipment Identification system under which the lost or stolen phone sets could be locked for others, chief of the country’s telecom regulatory body said Monday.

Talking to reporters here in Dhaka, the chairman of the Bangladesh Telecommunication and Regulatory Commission (BTRC) Manzurul Alam said, “We will introduce the system in December this year.”

He said owner of a mobile handset could lock his/her set immediately after it is lost or stolen when the system is introduced. “This would help us reduce the trend of mugging of mobile phone handset,” the BTRC chairman said.

He mentioned that Britain is the first country which successfully introduced this system where about 20,000 mobile phone sets are either lost or stolen a year. According to BTRC, there are total 45.4 million mobile phone users in the country as of August this year.

Xinhua

Taiwan stocks slide 6% as US rescue plan stalls

Taiwan stocks dropped 6 percent on Tuesday as financial shares including Cathay Financial tracked a Wall Street tumble after U.S. lawmakers rejected a $700 billion financial rescue plan.

The main TAIEX share index was down 363 points to 5,566.33 by 0220 GMT, after touching 5,534.72 points, back within a hair of

recent 4-year lows around 5,530.

Minutes after the open, Taiwan Vice Premier Paul Chiu reiterated the government’s policies to prop up the market.

The local market was closed on Monday due to a typhoon.

The Dow Industrials plunged on Monday in the blue-chip average’s biggest one-day point drop ever after U.S. lawmakers unexpectedly rejected the $700 billion financial bailout, spooking investors who saw it as essential to halting a global market meltdown.

“The local market was surprised that the U.S. bailout plan didn’t pass and investors’ confidence tumbled,” said Alex Huang.

Taipei, Reuters

Oil lower after US bailout plan rejection

World oil prices fell slightly in Asia on Tuesday following a nearly 10 percent drop in New York after US legislators dramatically rejected a plan to bail out the ailing financial sector.

The bailout deal proposed the purchase of up to 700 billion dollars worth of tainted mortgage-related assets at the root of a global financial crisis.

Dealers said collapse of the plan further heightened worries of an accelerated slowdown in the already-weak US economy which has been hit by falling home prices and turmoil in its financial sector.

New York’s main contract, light sweet crude for November delivery, fell 73 cents to 95.64 dollars a barrel. The contract had tumbled 10.52 dollars, or 9.8 percent, to 96.37 dollars a barrel at the close of trade on the New York Mercantile Exchange on Monday.

Brent North Sea crude for November delivery fell 54 cents to 93.44 after dropping 9.56 dollars to settle at 93.98 on Monday in London.

“I think it sort of blends in with the notion that we are heading for some tough times globally,” said Jan Lambregts, regional head of research with Rabobank Global Financial Markets.

“That is one of the reasons why oil prices came off so much overnight... We will see more selling pressure on commodities,” he said from Hong Kong.

Rejection of the bailout plan sent US blue-chip stocks crashing to their worst single day loss ever and deepened the US financial crisis.

Asian stock markets opened lower in reaction. Analysts said congressional approval of the bailout, while not perfect, would have bolstered the shaky global financial system which has seen the collapse of Lehman Brothers and forced a sale of Merrill Lynch to Bank of America.

“While the plan did not solve the root cause of the crisis, declining house prices, it would provide important support for the banking system, without which (the) outlook looks even bleaker,” said Dariusz Kowalczyk, chief investment strategist with CFC Seymour securities in Hong Kong.

“In consequence, recession looks more likely, which led to a crash in equity markets on concerns over earnings, and falls in commodities on worries over demand prospects,” he said.

Other analysts also painted a gloomy forecast. “The US is looking at a severe recession if Congress fails to pass some sort of package,” said Augustine Faucher at Economy.com. James Williams, an analyst at WTRG Economics, said downward pressure on oil prices should continue.

“Oil traded for the last five years on fear of supply interruptions. It is now trading on fear of economic collapse,” Williams said.

John Kilduff at MF Global agreed. “Expectations for demand are... in doubt with the expected future economic contraction,” he said.

Oil prices have already dropped sharply from record high levels above 147 dollars in July on worries that demand is shrinking in a US-led global slowdown.

Singapore, AFP