Yuma investment expert: It's high interest rates or inflation

A Yuma wealth and investment expert says continued congressional defeat of a $700 billion rescue package focused on lenders could drive up interest rates and make purchasing more difficult.

A House vote of 228-205 Monday defeated an emergency bailout for failing lenders and sent shock waves through the market, which fell 777 points - the largest one-day drop in history. The market began falling before the vote was announced, then bottomed out to surpass the 721-point drop the day after the Sept. 11, 2001, terrorist attacks. The percentage of the drop fell short, however, of the drops on Black Monday in October of 1987 and at the start of the Great Depression.

Tom Rush, wealth adviser for Yuma Wealth Investment Group, said that interest rates will rise on housing, credit cards and car purchases, among other areas.

"The gist is that a lot of companies are trying to sell assets to get debt down," Rush said. "A lot of businesses are running out the door trying to sell for 30 cents on the dollar. It's like if I told you you had to sell your house by tomorrow, you'd sell pretty cheap."

The problem occurred when lending companies took chances on buyers with poor credit at the height of the housing market, then could not recoup defaulted loans. Those loans, and the interest to be repaid on them, are still an asset to the company. But because the companies have so much debt because of defaults, they have difficulty paying operating costs while still freeing enough capital to continue lending. Many of the assets are now frozen or restricted, Rush said.

"Congress was going to take debt off the books to let companies continue to lend," he said. "(The vote) will have an impact because if someone wants to buy a car or refinance a credit card or buy a house, the liquid money needed is going to get harder and harder to get."

Plus, Rush said, retirement accounts are down 25 percent because of the sluggish stock market. People seeing retirement funds dropping become discouraged and have a tendency to save more, further hindering the economy and dollars in the market.

"The big impact is emotionally," Rush said. "People pull their arms in even more which adds to problem."

The eventual passage of the rescue plan is a near certainty, Rush said. The government is the only institution with enough capital that can borrow money at zero percent interest. It simply prints additional cash, then uses the funds to buy bonds at reduced prices. It then releases a limited number of bonds at reasonable times to keep the market balanced. It can buy bonds at 50 to 60 cents on the dollar, then let them sit for 10, 15, or 20 years or longer before releasing them at full value.

"The problem you have with government throwing money out there is that over the long term that causes inflation," Rush said. "You have too many dollars chasing too few goods. At some point we will get through this, but the next big thing is inflation. It might be a year from now or two years from now."

"The average person, they think it's 700 billion out the window," Rush said. "This is buying depreciated bonds at a time when bonds are beat to heck. It should be looked at more as an investment. These bonds will pay out more than what they cost. They asked (investor) Warren Buffet about it, and he said he'd take it in a heartbeat - he just didn't have enough money and couldn't borrow at zero percent interest."


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Matt Keller can be reached at mkeller@yumasun.com or 539-6857.

EDITOR'S NOTE: Story updated Sept. 30, 2008.  Congress defeated a $700 billion rescue package.