The $700 billion government bailout of the financial industry is an inefficient plan that will not ease the credit crunch hurting the U.S. economy, John Allison, the chairman and chief executive officer of BB&T Corp., said yesterday.
There is no guarantee that the plan will persuade banks and other financial institutions to start lending money again to companies and individuals, Allison said at a panel discussion about the financial crisis at Wake Forest University in Winston-Salem.
Allison participated in the panel discussion with Reggie Imamura, the managing director of PNC Capital Markets, and six faculty members from the WFU business and medical schools.
About 500 people attended.
The panelists discussed how the financial crisis began in 2006 after the housing market soared in the 1990s and during the early years of this century. Investment banks sold securities based on risky subprime mortgages.
In the late 1990s, government officials wanted to provide affordable housing to more people and increase rates of home ownership. Too many houses were built either too large or in the wrong places, Allison said.
"Some people could not afford the houses," he said.
He attributed much of the financial crisis to the faltering government-backed mortgage companies Freddie Mac and Fannie Mae, which have $5 trillion in debts. Housing prices have fallen 20 percent during the crisis, Allison said.
For the housing market to recover, he said, home prices need to fall an additional 10 percent nationally to make them more affordable. In turn, the increased sales would help builders, banks and real-estate companies.
Allison suggested that the federal government provide a 10 percent tax credit to home buyers, which would also help lower housing prices and stimulate the economy.
David Coates, a WFU political-science professor, also questioned the bailout plan, but he said that the federal government does have a role to play in buying toxic mortgages and restoring trust in the financial system.
Coates said that the bailout plan was the best option that Treasury Secretary Henry Paulson could devise, even though "taxpayers will be soaked."
However, he said, Congress moved too quickly in approving the plan because it was scared about the threat of a depression.
A silver lining in the crisis might be that the public realizes that "we are living on borrowed money, and we are living beyond our means," Coates said.
During the economic booms of the 20th century, people's jobs provided them with enough money to buy houses that they could afford. But in the 21st century, too many people bought houses based on the salaries they hoped to earn in future years, Coates said.
The financial crisis has produced a level of fear that sets up a self-fulfilling loop of economic problems, said Steve Reinemund, the dean of WFU's School of Business. Many companies are now reluctant to borrow money, even if it is available, and forgo potential expansions. That may lead to more layoffs.
"It is a scary time for consumers, taxpayers and companies," Reinemund said.
■ John Hinton can be reached at 727-7299 or at jhinton@wsjournal.com.
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