Backers say failure of federal bailout plan would amount to financial 'Armageddon'

What if?

That's the question on millions of minds these days, as the worst financial crisis since the Great Depression ensues.

The question posed most frequently by business owners, bankers, economists, politicians and others is this: What if federal regulators didn't step in last week to propose a massive bailout of so-called "ill-liquid" assets from the nation's financial institutions?

The bailout was proposed by Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson and envisions about $700 billion in new federal spending to take over bad debts left over from the subprime mortgage crisis. At press time for the Boulder County Business Report, negotiations were ongoing among the Bush administration and congressional leaders, many of whom are skeptical or outright hostile to the idea.

But what if the Fed hadn't acted? Many economic observers say the consequences would have been dire, akin to financial "Armageddon."

Interestingly, the term "Armageddon" has been used repeatedly in recent weeks and months to describe what might have happened had the Fed not taken one action or another. I heard it used by one economist to describe the consequences had the Fed not bailed out AIG, the insurance-industry giant. I heard it again on a national radio program to describe what would have happened had the Fed not assumed control of Fannie Mae and Freddie Mac.

And I'm hearing it now to describe what would have happened had the Fed not stepped in last week with a massive bailout proposal. Stock traders told media last week that the market was 500 trades away from Armageddon on Sept. 16, when the Fed injected $105 billion in liquidity. Without that, the Dow Jones Industrial Average was poised to collapse to 8,300, a decline of 22 percent, the traders said.

"The alternative is complete financial Armageddon and a great depression," a former Federal Reserve official told Politico.com. "Where do they go after this? Well, the U.S. government could nationalize the banking system outright."

So what does Armageddon look like? Here's what I've been able to glean from a variety of print and online sources:

* Failures in the financial sector would accelerate. As went Lehman Brothers Holdings Inc., Merrill Lynch, Bearn Stearns and AIG, so would go other financial giants, banks, insurance companies and hedge funds.

* Insolvency would spread to nonfinancial companies, with failures of companies in the manufacturing, retail, service and other sectors because they would be unable to obtain new financing.

* Lending activity would grind to a halt - something that was already foreshadowed last week.

* The United States could default on its debt, now held by the Chinese, Japanese, Russians and other foreign investors.

* Foreclosures would likely continue their surge, as an overall economic decline prompted more defaults, beyond just the subprime market.

* The stock market would collapse, as investors attempt to unload their shares as quickly as possible.

* Job losses would balloon because of layoffs in the financial and other sectors.

Even with the bailout, it's unclear what the future holds for the U.S. and global economies. But we are likely to see a continued decline in the value of the dollar, more - perhaps many more - bank failures, a glut of distressed housing that eventually will hit the market and drive down housing values, soaring oil prices - in short, nothing pretty.

How all of this affects our economy here in Boulder and Broomfield counties remains to be seen, of course. The Boulder Valley has fared far better than the rest of the country in the current foreclosure crisis, and we continue to enjoy strength among our major employers. But it's unrealistic to assume that a global financial Armageddon would not affect our region.

But it all begs another question: What if the bailout doesn't work?

Christopher Wood can be reached at 303-440-4950 or via e-mail at cwood@bcbr.com.