IT'S TIME TO TURN ON OTHER GROWTH ENGINES

       Surprisingly, after the Congress accepted the bill, the price of shares started to fall at a greater pace everyday instead of recovering as happened on September 19, the day the Paulson proposal was announced. Why? Because, it was about confidence, which is always sensitive with any change, even a minute one. On September 19, the firm announcement by Paulson and the very strong support of President Bush created confidence that this proposal would be approved swiftly, the size of the bail-out fund would be big enough, and it would be implemented with enough flexibility as proposed by Paulson. It was the size of the fund, the potential speed of approval and the flexibility in its implementation that convinced the public that distressed assets would be taken out of the financial institutions promptly and their financial positions would strengthen soon, ending up in a massive purchase of shares of financial institutions, which brought up their prices. But after over one week, the Congress rejected the bill, confidence shattered a bit even though it was finally approved after two weeks, because during this period of time, financial institutions in the US that needed help from this bail-out plan got weaker very fast, making investors speculate that the size of distressed assets to be tackled would be bigger than the bail-out fund.
       Besides, some financial institutions in Europe collapsed and needed to be taken over by another financial institution. Worse is that the Congress set conditions limiting the utilisation of the bail-out fund into phases, allowing only US$250 billion in the first tranche. This condition had a negative impact psychologically. The limited amount of the first tranche would speed up sale of distressed assets as sellers are not fully confident about the availability of the next tranche. Should the total US$700 billion be allowed to be implemented freely, financial institutions would not rush to sell as they would feel that the whole amount is still available, which would not put too much pressure on the price of distressed assets.
       Moreover, the recent behaviour of the Congress indicated to the public that if this $700-billion fund were not enough, there would be no hope for additional amount. This created fear that the amount of distressed assets beyond $700 billion would be left to undermine the strength of certain financial institutions. Besides, the Congress did set some conditions in the implementation of the fund, which makes it less flexible and thus creates fear that certain distressed assets may not be accepted by the buyer and the implementation may not be fast enough to save the financial institutions. Consequently, the perception of the plan as approved by the Congress is much different from that announced by Paulson on September 19. With the plan as approved, the public believed that financial institutions without excessive distressed assets could manage to sell them down and survive smoothly, but those with too much distressed assets may have to increase capital to compensate for some additional losses. Definitely, the plan as approved could not create confidence that all distressed assets would be taken out and that all financial institutions would recover to perform their normal duty of extending credit to the private sector soon.
       It could be said that even if this bail-out plan as approved by the Congress could limit the damage of the financial institutions, it would not strengthen all financial institutions enough to support the recovery of real sector for another long while. At the same time, the major increase of oil price in the first half of the year still has a second round effect on inflation in the second half and thereby slows down private expenditure. Moreover, higher unemployment, caused by the slump of housing construction and by the rationalisation of work process of various industries to reduce cost, has affected private consumption. The reduced consumption leads to the reduction of sale and production. The prices of shares in the real sector are inevitably decreasing.
       Unfortunate developments in the US have affected the whole world, in the financial sector as well as the stock exchange and international trade. The bail-out plan approved did save the financial institutions from weakening further and prevented contagion into other countries, especially those in Asia where investments in US mortgage-backed securities were very limited. But the effect on the stock exchange is inevitable since foreign investing institutions had to sell down their investments overseas to bring money back to support the liquidity and financial strength of their parent companies in the US and Europe. Besides, the reduction of spending by buyers in the US, in Europe (which experience similar consequences from sizeable investment in mortgage-backed securities and big surge in oil price) and in Japan (which has been affected by big surge in oil price and inflation) will definitely reduce exports of various countries in Asia, including Thailand. We have to be prepared for the slowdown of export and must try to speed up other growth engines instead, be it government investment, private investment, or domestic consumption. Leadership and efforts of the government in the right direction are now very much needed.