Give the "Bailout" a Chance

Suzanna de Baca -- Expert Business Source, 10/10/2008 9:27:00 AM

“Didn’t the bailout work?” asked a friend of mine today after watching the stock market tank even after the House approved the economic bailout bill last Friday. In the wake of the stock market’s downward spiral over the last few days, she concluded that the bailout did no good. But consumer confidence does not rebound over a weekend, especially with other disturbing global economic issues dominating the headlines. As with any kind of healing or recovery, fiscal improvement will take time. 

I told this friend about an insightful piece of market commentary I’d just read, written by Ric Edelman, CEO of Edelman Financial Advisor and an author of six books on personal finance, including the recent Lies About Money. In the special report, entitled “Be Patient: The Rescue Plan Needs Time to Work,” Edelman compares the economic crisis to a fire in a theater, pointing out that even when the fire is extinguished and you return to the theater, it doesn’t mean that you’ll love the movie that’s playing. 

Edelman says that this bailout is like putting out a fire. It stems the damage but things still need to be cleaned up.  “It will take several weeks for the Treasury Department to even begin disbursing the $700 billion into the economy, and it will take more time for that cash infusion, massive though it is, to improve the economy,” he notes, asserting, “But improve the economy it will.”

Senior CNNMoney.com writer Tami Luhby predicted that the bailout will take time even before this week’s market decline called the measure’s success into question among consumers. In an Oct. 4, 2008 article entitled “Bailout: Will it Work?” Luhby cautioned, “Don't expect lending to ramp up overnight, however. It may take weeks for confidence to return, experts said. Or even longer.”

What is interesting is that 80% of the selling over the last few days was by individual investors, Edelman pointed out in his article, citing the New York Stock Exchange as a reference. After the DJIA fell 800 points by mid-afternoon on Monday, he says, institutional investors jumped in and began purchasing some beaten up stocks. Individuals tend to panic and make irrational judgments when times seem dire; while that may seem like little consolation, it does suggest that institutional buyers might be recognizing some bargains and buying. The bailout may not have yet started to work, but professional investors may be feeling better, or at least seeing some good values among public companies.

While no one can predict when the bailout will start to work or when economy will start to recover, the bailout will indeed gradually infuse capital into the system and ease critical borrowing between banks, businesses, and consumers. If history is any indication at all, eventually the markets and the overall economy will get better. But it won’t happen over night.

If you have a broken leg, the doctor will likely set the bone, put a cast on the limb, and tell you to stay off of it for a given period of time. Just because you’ve treated it doesn’t mean it will automatically get better. The economy is the same. We need to stop panicking and give it time to heal.

Suzanna de Baca is president of Private Capital Solutions Group. Securities offered through Broker Dealer Financial Services Corp. Member FINRA & SIPC. Investment Advisor Representative of Investment Advisors Corp., A Registered Investment Advisor.  Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.