And The Walls Come Tumbling Down

[October 8th, 2008]

The meltdown of Wall Street and Congress’ approval last week of a $700 billion bailout package may seem distant issues in Oregon.

But there are two local effects of the fall of dominoes touched off by the recent tumult.

The congressional bailout has become an issue in Oregon’s tight U.S. Senate race. And the continued economic chaos this week (as evidenced by the free-falling stock market) raises questions whether the congressional rescue will help local borrowers when they look to finance everything from paychecks to paper clips.

On the political end, U.S. Sen. Gordon Smith (R-Ore) voted for the measure, saying in a statement, “This rescue package will help every Oregonian with a savings account, retirement plan, car loan, student loan, farm loan, or mortgage,” and cheering the measure’s restoration of timber payments to rural Oregon counties for four years.

His Democratic opponent, Jeff Merkley, says he would have voted no along with Sen. Ron Wyden (D-Ore.).

“It was dressed up from the original version, but it was still a blank check to Wall Street, without meaningful oversight of the Treasury,” says Merkley, the Oregon House speaker. “And it did not address the root cause of the financial crisis.”

There are certainly many Oregonians outraged about Wall Street excesses and the pain that mortgage holders are suffering, says U.S. Rep. Earl Blumenauer (D-Portland).

“I have heard from thousands of my constituents over the last two weeks,” Blumenauer said in a statement explaining his no vote. “The overwhelming response was one of opposition to the federal rescue.”

But not every Oregon Democrat reached the same conclusion. Rep. David Wu (D-Portland) switched his no vote on the earlier bailout bill to a yes, saying, “In the end, I believe the risk of doing nothing is too great.” That certainly complicates any Smith-bashing by Merkley. (Another Oregon Democratic rep, Darlene Hooley, voted yes on both versions of the bailout.)

“Merkley is taking a risk here,” says Lewis & Clark political science professor Robert Eisenger. “He gave Gordon Smith an issue and now Smith can say, ‘My opponent would not have taken this difficult but necessary vote.’”

What many citizens may not see is the liquidity crisis has brought credit markets to a virtual standstill. That paralysis threatens everyone, because without access to short-term credit, employers will struggle to pay for inventory and meet payroll.

In a letter to Oregon newspapers Oct. 3, Jay Clemens, CEO of Associated Oregon Industries, the state’s largest business lobby, praised Smith for his yes vote.

“Oregon is a manufacturing state, heavily dependent on a free flow of credit and sensitive to economic downturns,” Clemens wrote. “Further damage to our already faltering economy will cause more layoffs, erode our ability to fund education and public safety, and hurt every business.”

Because most businesses borrow from lenders in private transactions, the liquidity crunch is most visible in the market where municipal borrowers—generally considered more credit-worthy than businesses or individuals—get their cash.

On Monday, Bloomberg News reported that the cost of borrowing one-year money for states and local governments has shot up 50 percent over the past two weeks. And new issuance of fixed-rate bonds has virtually ceased, Bloomberg reported, dropping to about 15 percent of normal volume.

Both California and Massachusetts have alerted the federal government they may need to borrow money from the U.S. Treasury because of their inability to sell short-term notes at reasonable prices.

Oregon State Treasurer Randall Edwards says Oregon has “plenty of money,” because it made short-term borrowings for the year back in June. That should last through the end of the year, Edwards says.

The City of Portland plans to issue about $31 million in general obligation bonds Oct. 28 to retire old debt and finance a fire station. That will be a good barometer of market health and the efficacy of the congressional bailout in starting to repair the liquidity crunch, says city debt manager Eric Johansen.

Merkley says he believes the liquidity crisis is real. But he does not believe the threat it poses is grave enough to approve the bacon-wrapped package Congress green-lighted last week.

“It isn’t an ‘either-or’ question,” Merkley says. “Congress got stampeded over a cliff and gave up its leverage.”

Merkley predicts that because the legislation failed to address re-regulating financial markets or putting in place protections to prevent future meltdowns, it will not give investors much confidence, nor satisfy voters that Congress has their interests in mind.

“We’ve sent a mixed message: We’re going to inject liquidity by exchanging cash for bad assets,” Merkley says. “But if you don’t change the conditions that led to the problem, how do you establish confidence?”

He adds that pushing through fundamental fixes will be much harder now that the initial sense of crisis has passed.

But State Treasurer Edwards, a Democrat who oversees the investment of about $75 billion in public funds, agrees with Smith and other bailout proponents that there was no time to craft such legislation.

Edwards points to the 777-point drop in the Dow Jones industrial average last week after Congress rejected the initial bailout as evidence of how jittery investors are and how they are focused on the future, not the past.

“There are a lot of things to be really frustrated about,” Edwards says, “but there are times when you have to look forward, not backwards.”