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On the Issues: What does it all mean?
The economy probably will get worse before it gets better, but experts suggest staying calm
Specialist Troy Dumaresq works on the floor of the New York Stock Exchange on Wednesday. An angst-ridden Wall Street tried but failed to find stability, with investors attempting to determine whether an emergency interest rate cut would end the paralysis in credit markets. - photo by RICHARD DREW

General Election Voters Guide

Our Views: Charging to the future 

STORY: Banks having to foreclose on builders' properties

STORY: Squeezed but not squashed 

Over the next two weeks leading up to Election Day, we will look at key issues in the presidential campaigns, with reaction from local residents on how they will be affected by the candidates’ plans. Previously, we’ve examined Previously, we’ve examined health care, foreign policy and immigration. In coming weeks, we’ll look at energy and the environment.

On the Issues: The economy

Barack Obama

Would inject $75 billion into the economy through tax cuts and direct spending, targeting working families, seniors, homeowners and the unemployed. He contends this would prevent 1 million Americans from losing their jobs. His plans also include $45 billion in reserves that could be injected into the economy quickly in the future if deterioration continues.

Enact a windfall profits tax to provide a $1,000 emergency energy rebate.

On taxes: Cut taxes up to $500 per person, or $1,000 per family, for lower and middle-income Americans; simplify tax filings; eliminate income taxes for seniors making less than $50,000; eliminate all capital gains taxes on start-up and small businesses; double federal funding for basic research in science and technology, with tax credits for businesses.

On trade: Push for policies that opens up foreign markets to American goods, including revising NAFTA.

On jobs: Provide financing to transportation infrastructure projects; raise the minimum wage; expand family and medical leave.

On mortgages: Create a 10 percent universal mortgage credit to provide homeowners who do not itemize tax relief; reform industry to crack down on subprime lenders; reform bankrupcty laws.

John McCain
Balance federal budget by the end of his term by controlling federal spending, eliminating earmarks, streamlining government operations.

Reform Social Security and control Medicare growth.

Would declare a summer gas tax holiday, suspending the 18.4 cent federal gas tax from Memorial Day to Labor Day.

On taxes: Lower corporate tax rate from 35 percent to 25 percent. Keep the top tax rate at 35 percent, maintain the 15 percent rates on dividends and capital gains, and phase-out the Alternative Minimum Tax; allow first-year deduction, or “expensing,” of equipment and technology investments, establish a permanent research and development tax credit equal to 10 percent of wages spent on R&D; ban any Internet taxes and reduce estate tax rate to 15 percent.

On trade: Lower trade barriers.

On jobs: Overhaul unemployment insurance and make it a program for retraining, relocating and assisting workers who have lost a job; reform job training programs and   strengthen community colleges and technical training; encourage workplace flexibility for scheduling, promote telework; making health insurance more portable.

On mortgages: Spend $300 billion of the Wall Street rescue package to buy distressed mortgages directly from homeowners and replace them with “manageable mortgages.” The loans would be reduced, at taxpayer expense, so borrowers could afford to keep their homes.

Source: candidate Web sites

It is the topic that everybody is talking about.

There is no doubt that the current state of the economy and the $700 billion bailout have recently become the main issues of this year's presidential election.

In Tuesday's presidential debate, conducted in a town-meeting style format, most questions posed to Republican John McCain and Democrat Barack Obama revolved around the economy and the current financial crisis. All 11 of the people who participated in The Times debate panel that night also said they wanted clear answers about the economic crisis and what each candidate plans to do to redirect the economy during his presidency.

The issue has had its effect on voters' decision-making. As it has become a major issue, McCain has fallen in the polls. Poll numbers from SurveyUSA, taken shortly after each party held its political convention in late August and early September, show that voters were almost evenly divided over McCain and Obama. But with an economy in limbo, Obama has surpassed his opponent in most polls.

Every day, newscasts are filled with more reports about the day's up-and-down financial markets and analyses of how we got here and what's coming next. But do you really understand what they're saying and what it means to you?

What happened?
In short, a weak system of vague mortgage trading crumbled.

Economist Jeffrey Humphreys, who is the director of the University of Georgia's Selig Center for Economic Growth, said the collapse was a long time coming, and as a result, the economy has moved into a "moderate recession."

The country's financial markets have been in a state of turmoil for the past few weeks and will likely stay that way for some time despite the government's bailout plan, Humphreys said.

There are three problems affecting the country's - and, since they are so tightly interwoven, the world's - economy, Mercer University economist Roger Tutterow said.

One is elevated oil prices. Higher energy prices have been an issue for a few years now, but to consumers, they act like a tax, Tutterow said.

"There's not that much in the short run (consumers) can do to avoid paying them," Tutterow said.

The second burden on the economy is the housing market, and the problem in the housing market is closely related to the economy's third problem, which lies in the financial market, Tutterow said.

Within a matter of 18 months, the housing market went from being quite strong to the "most significant correction in housing in about 35 years," Tutterow said.

As it became easier for individuals with lower income - or as economists call them, "high-risk lenders" - to access credit, the housing market skyrocketed, Humphreys said.

Within months, these new homeowners still had the same income, but the value of their homes and the cost of their payments rose along with energy costs. Foreclosure rates followed suit, and contractors stopped building houses.

That correction in the housing market fed into the problems in the financial market, Tutterow said.

As foreclosure rates skyrocketed this year and more people defaulted on their loans, banks were no longer able to make the money they needed to stay in business. Since banks had divided up individual mortgages and sold them to other financial institutions so that all could share in the risk, all of them shared in the collapse when people began defaulting on their loans, Tutterow said.

What followed is the collapse of major financial institutions like Lehman Brothers and Washington Mutual.

As the crisis began unfolding and Treasury Secretary Henry Paulson outlined the Bush administration's $700 billion bailout plan, the issue quickly became a part of the presidential election. Both Obama and McCain began challenging each other on solutions or lack thereof. McCain even talked of suspending his campaign - and possibly skipping the first presidential debate on Sept. 26 - to make sure he could be on Captiol Hill to help Congress pass a solution.

Both Obama and McCain returned to Washington, taking part in a meeting with President Bush, Paulson and ranking members of Congress. And, both senators voted in favor of the bailout that passed the Senate 74 to 25 on Oct. 1, then passed the House 263-171 on Oct. 3. It then was signed by President Bush.

Though the bailout has passed, the financial markets still have been shaky in the week following the action.

The most glaring problem in the financial markets now is that financial institutions are not able to accurately assess the risk involved in making deals - or decide to whom they should lend money and how much.

Whereas before, when banks and mortgage brokers were lending too freely and allowing people to take on too much debt, now, they are hesitant to lend at all and the credit system is at a near standstill, Humphreys said.

The $700 billion bailout plan recently backed by federal legislators and the raising of the cap of insured deposits to $250,000 may not be a perfect solution, but it will help, Humphreys said.

"The federal reserve and the treasury are doing a lot of heavy lifting," Humphreys said. "It's not perfect, but it's the only game in town right now. Everything they've done helps to some degree."

Last week's move by the federal reserve to cut interest rates could have prevented an even more severe recession, Humphreys said.

How does it affect Hall County?
The difference between the current recession and previous recessions is that this one is having more of an impact on the middle and lower classes, Humphreys said.

Financial institutions now are less willing to lend money to even the most credit worthy of individuals. As a result, big ticket purchases may have to wait a while, Tutterow said.

Small business owners also are going to have a harder time getting loans, and in turn, may start tightening up on the credit lines they extend to their best customers, said Tim Evans, vice president for economic development for the Greater Hall Chamber of Commerce.

"If (business owners') credit terms are tightening from their suppliers, it makes it more challenging for them to offer the same credit terms for their customers," Evans said.

Without as much access to credit, small businesses will not expand payrolls like in the past, and the ability to offer raises or hire new employees will be compromised, Tutterow said. Some businesses may not be able to continue to operate, because of the "credit crunch," he said.

Yet, Evans said that since Hall County's economy is supported by a range of industries like health care and a wide variety of manufacturers ranging from automotive to food processing industries, it can weather the storm in the financial markets.

Hall County's economy is "very diverse, so it's given us a lot of strength in our economy during (a time) that's been traumatic for some areas," Evans said.

"We're in very good shape, all things considered."

But a lot of wealth, in terms of home and stock values, has been destroyed in a short period of time, and that is a problem that will affect all sectors of society, Humphreys said.

"These wealth reductions are going to accentuate the pullback in consumer spending that had already begun before the financial panic occurred," Humphreys said.

The wealth destroyed in the stock markets over the last couple of weeks mainly affects those with higher incomes, Humphreys said. The loss in home values, on the other hand, mainly affects those with lower and moderate incomes.

Losses in home values affect consumer spending more than the downward-spiraling stock market, Humphreys said.

"That's one reason why, during this recession, the pull backs in consumer spending are going to be much sharper than it was in the previous recession," Humphreys said.

Retailers are going to feel the effects when the holiday shopping season comes in the next two months, Humphreys said.

"It's going to be a very blue Christmas this year." he said.

The stunted levels of consumer spending already have begun to undercut local governments through budgets with lower-than-projected sales tax revenues. In fiscal year 2008, which ended June 30, Gainesville received $37,000 less in sales tax revenues than in the previous fiscal year, the city's chief financial officer Melody Marlowe reported.

As a result, local governments are having to cut spending and services, and may start looking for other ways to recuperate the lost revenues. Hall County officials already are considering forcing county employees to take off one day each month without pay to make up for declining sales tax revenues.

The state is facing an estimated $6 billion budget shortfall, also due to reduced revenue, that is trickling down to budget cuts for local governments, agencies and school systems that depend upon state funds.

What can you do?
Both presidential candidates have their own plans for fixing not only the current financial crisis, but also shoring up other sectors of the economy and helping it rebound. A new president won't take office until January, so what should you do in the meantime if the crisis continues?

Most financial advisers agree: Don't sell your stocks.

Johnny Johnson, a financial adviser who manages about 100 investment accounts for clients with Raymond James, said many of his customers are concerned about the hit their investment portfolios have taken.

"I think their biggest concern is whether or not there is a bottom near at hand or whether this is just going to be a prolonged, self-perpetuating sell-off," Johnson said.

Johnson advises investors not to sell their stocks - not now - and calls the country's current financial situation severe but temporary. The key, Johnson said, is not to react to the markets emotionally, but rationally.

"Temporary market aberrations like this are certainly not enjoyable, nor are they comfortable, but they're not ... the harbinger of death either," Johnson said. "This is just a very severe and prolonged sell-off in the market. It doesn't mean that the end of the world's coming."

The panic that surrounds the credit crunch, much like the consumer panic surrounding the recent gas shortages, could actually make the problem worse, Tutterow said.

Humphreys agrees. He said outside of the financial and housing markets, other markets are still doing well.

"We're not staring into the face of a depression. We're not going to experience something like a lost decade," he said.

But Humphreys does not hesitate to admit that the healing process from such a financial blow will be slow.

"It's hard to find adequate shelter from the major headwinds that confront us, especially at this point in time," he said.

Folks can mitigate the effects of the recession by working to eliminate debt, which is by no means a quick fix, Humphreys said.

In the meantime, avoid incurring any more debt by delaying car, furniture or home purchases, Humphreys said.

The worst thing to do, Humphreys said, is panic.

"This is a true panic, and the worst thing you can do, really, is to get caught up in it too much, in other words, to panic yourself and sell everything that you have at a panic price," he said.

Even though daily news from the financial sector seems to be nothing but doom and gloom, the current financial situation creates some good opportunities to invest in the stock market, Johnson said.

"Our inclination should be, from a rational standpoint, to invest when the market is down, and to sell when it's high, but your emotional reaction is the opposite," Johnson said.

Johnson encourages people who may be "sitting on some cash" to invest some money in the stock market, but also to be cautious about what they buy and "not to bet the farm on it."

"We could very well, and I would say probably will, drop a little bit from where we are right now, but I don't think we're terribly far away from some fairly substantial support in the markets," Johnson said.

He is confident that the market will return, maybe not next week, because after more than 20 years watching the market, Johnson has seen it get ugly before.

"This isn't my first rodeo."

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