US$700-billion bailout not sufficient liquidity to resolve financial crisis, TD Bank’s chief economist says

The US$700-billion bailout package the U.S. Senate passed on Oct. 1 will not solve the fiscal problems plaguing the U.S. economy, but it will help to some degree, Don Drummond, TD Bank’s chief economist, told delegates attending the National Insurance Conference of Canada in Ottawa-Gatineau, Quebec.
The question, ‘Will the bailout package provide sufficient liquidity?’ was posed to Drummond during a Q&A session following his presentation.
“What’s sufficient?” Drummond responded. Although the US$700-billion proposal is not nearly sufficient to rid the United States of the nearly US$5-trillion worth of mortgage-related debt crippling the U.S. financial sector, he observed, its liquidity will nevertheless serve to “free up” some available credit in the marketplace.
Drummond noted the U.S. bailout package does not remove the debt owed; it simply moves some of the debt over to the government books from the books of the financial services sector.
“That’s easier for the markets to handle, but the economy still has a long way to go before recovery,” he said.
Joel Baker, president of MSA Research Inc. and host of the NICC, asked Drummond to comment on whether or not the current state of affairs south of the border will affect the United States’ AAA bond rating.
“If you look at the financial mess, then they don’t deserve to be called the financial leaders of the world,” Drummond replied. “I think that they could lose that ‘AAA’ rating, but on a narrow basis, it doesn’t do a heck of a lot,” Drummond replied. He said it would take a downgrade down to a ‘BBB’ rating for any serious consequences to develop.
Given its huge imbalances on its fiscal and trade sheets, and its dependency on foreign banks to “pick them up,” the United States “has phenomenal vulnerability right now,” Drummond said. And there are signs they still haven’t learned their lesson, he added.
“I was thinking they’ll get a new administration that will begin to chip away at the fiscal mess, but then I look at what happened last night [when the U.S. Senate passed the bailout package] and, for completely unprovoked reasons, they added US$100 billion dollars of tax cuts to this financial problem.”