WILD RIDE

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Published: October 6,2008

The bailout of the financial system that once was lost appears to have been found again.

The U.S. Senate voted 74-25 the evening of October 1 to pass a sweetened version of the package that was shot down by the House days earlier.

The updated version of the bill that would use taxpayer money to purchase mortgage-backed securities that doomed several financial institutions and froze the credit market includes new items such as tax breaks for businesses, a one-year relief from the alternative minimum tax for roughly 20 million middle income Americans and an increase in the FDIC cap from $100,000 to $250,000.

Among the more questionable tax breaks slipped into the bill:

• $6 million for manufacturers for makers of children’s toy bow-and-arrow sets

• $192 million for rum producers in the U.S. Virgin Islands and Puerto Rico

• $128 million for auto racing tracks

• $33 million for corporations operating in American Samoa

• $10 million for small-to-medium budget film and television producers

In all, $1.7 billion in new incentives were added to the new version.

“This is the same bill (that failed), but with more bells and whistles,” said Ole Miss economics professor Andrew Young. “They’ve taken the same thing the House rejected and essentially tacked on a bunch of irrelevant things.”

The great debate over the bill has centered on the principle of government getting involved in the economy. Chris McAlpin, of Financial Strategies Group in Ridgeland, called the passage of the bill “a painful necessity.”

“I’m not a big fan of government intervention, but this was needed,” he said.

Assuming House leadership is able to flip enough of the members who voted against the original version and the bill passes, short-term market effects are likely to be a softening of the credit market, which would provide rolling lines of credit many small businesses depend on to stay open and a psychological boost for investors. But this will not be a quick fix, McAlpin said.

“We’re still in a bear market, and it will take some time for the market to unwind, so to speak,” he said, noting that the housing market will have to improve before any real turnaround occurs.

Neither of Mississippi’s senators voted for the measure. Roger Wicker, in a statement, called the updated bill “an improvement from the initial Paulson plan. But at its core, this is still the same plan that calls on taxpayers to go $700 billion further into debt in an attempt to fix this problem, while doing absolutely nothing to prevent it from happening again.”

In a press release issued by his campaign, Cochran pointed the finger at the Bush Administration: “I am disappointed that the Administration has not used its existing powers to assist the financial community in dealing more effectively with our national economic crisis,” Cochran said. “Even though I voted against the bailout proposal before the Senate, I will work with the Administration to expedite the development of an acceptable and workable plan for recovery.”

One aspect of the new package that is causing controversy is the announcement by the Securities and Exchange Commission that it will ease restriction on market-to-market accounting. Wicker called it “a positive step.” Young called it “truly dangerous because it allows financial institutions to lie about the condition they’re in.” McAlpin said it was “an extremely bad idea.”

If it passes, the most noticeable effect on Mississippi’s economy, McAlpin said, will be felt within small- and medium-sized banks and businesses.

“They will recognize that relief is on the way and they won’t tighten up (borrowing and lending) like they would have,” McAlpin said.

As for how long the full brunt of the bill is felt, McAlpin likened the timetable to that of the Federal Reserve raising or lowering interest rates. “Most likely it will take six to nine months for anything substantial to happen.”

“The market should correct this,” Young said, adding that the increase in the FDIC cap was “completely worthless. All this will do is draw out these bad lending practices that got us here in the first place.”

McAlpin agrees that idea fits into the worst-case scenario.

“This legislation is so intrusive, what happens if we don’t learn our lesson?” he asked. “The worst thing is we now have the precedent of government intervention. When it’s time for the government to back out of this, and they don’t completely let go of it, then you have a government that is way too involved in the economy.”

Contact MBJ staff writer Clay Chandler at clay.chandler@ msbusiness.com .

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