As the US House of Representatives voted against the $700-billion bailout package on Monday, the US stock market fell 777 points, or by 7 percent?a curious confluence of a normally lucky number in a context that is anything but lucky.
Still, hardly anyone believes that the US Congress will not act on some bailout package?the stakes are simply too high, at least for Americans, for US lawmakers to risk inaction.
It may be for this reason that Asian markets, while not spared the market plunge, showed some degree of resilience in the face of the (initial) bailout rejection.
Can Asia, in fact, be largely immune to a possible crash in the US economy? Have Asian economies come to possess an innate strength of their own that could stand up to the turbulence coming from the West?
Do the fortunes of ordinary Asians?and here at home, of ordinary Filipinos?really hinge that much on the passage of the proposed Bush economic rescue plan?
To understand how the US bailout plan would impact on the rest of us, we need to understand what the plan itself hopes to do.
Put simply, the plan would permit US Treasury Secretary Henry Paulson to buy from troubled US financial institutions, using taxpayers' money, up to $700 billion worth of the so-called "toxic mortgages" or failed subprime loans.
These are the loans that had been lent by banks and mortgage companies to American home buyers that the latter could no longer pay for.
Such buyout will permit millions of these homeowners who now face the threat of losing their homes to foreclosure to keep their homes, at least for now.
Avoiding bankruptcy
But more urgently, this will help the banks holding these failed loans to avoid going bankrupt the way financial giants Fannie May, Freddie Mac, Lehman Brothers, Washington Mutual and AIG already have, with many others big and small still lined up for a similar fate.
And without a confidence booster such as the bailout package, many banks could fail even sooner as depositors begin to panic and rush out to withdraw their money, creating a widespread bank run that would hasten the banks' demise and possibly collapse the whole banking system.
With or without such collapse, the drastic shrinkage in the amount of money available in the system for investment and consumer loans would kill (as it already has killed) huge numbers of American jobs.
This would further reduce the money in the hands of Americans with which to buy goods and services, and send the US economy into a tailspin not seen since the Great Depression.
Fallout outside US
Outside of the United States, expectations vary on the magnitude of the resulting fallout that other countries may suffer.
That fallout would manifest in two forms. The more direct one would be through losses by foreign (non-US) banks which either have direct investments in the failed US financial giants, or which may have invested in the complex financial products (derivatives) built from those "toxic mortgages."
Some large Philippine banks have already disclosed having direct investments in (i.e., loans extended to) Lehman, running in the tens of millions of dollars.
The amounts involved are reportedly too small to threaten the stability of the concerned banks, even if all those investments would be totally lost.
And with a US bailout, those investments would not be a total loss, making the net impact on our banks even lighter.
Derivatives
As for the derivatives, there is apparently very little of that in the portfolios of local banks and investment houses, as few Filipino bankers feel comfortable venturing into these exotic products that hardly anyone understands.
Thus, we are told that local banks' portfolios remain dominantly if not entirely in the form of reliable "plain vanilla" investments like loans and government bonds.
Our banks can expect lower profits this year (and second quarter figures already show this to be the case), but we, depositors, are not about to lose our money other than through eroding purchasing power due to higher inflation.
In short, there is no reason to panic and pull our hard-earned savings out of our banks, trust accounts and mutual funds.
Other form of fallout
The other form of the fallout would be seen in the "real" markets of producers and consumers, as opposed to the financial or money markets.
The question to ask is how Filipino producers, workers and consumers would be affected by the worst-case scenario of a deep US recession comparable to the Great Depression in the 1930s, when the US GDP (gross domestic product) dropped 30 percent in a span of four years (falling 13 percent in 1932-33) and unemployment reached 20 percent.
Few analysts expect that Asian economies would be pushed into recession by such a plunge in the US economy, as the observed rapid growth in domestic demand can more than offset a drop in imports by the United States and Europe from the region.
Furthermore, even as the United States remains the world's largest economy, China and India have taken over as the engine of global growth in recent years.
Still, both economies have the United States as their top export partner, with both relying on the latter for about 17 percent of their total exports.
For the Philippines, the United States has long ceased to be its most dominant trade and investment partner, now accounting for also 17 percent of our merchandise exports, which is less than half of the 35 percent it accounted for 10 years ago.
However, the United States takes the lion's share (85-90 percent) of our business-process-outsourcing market, which probably dominates our services exports to that country.
As to foreign direct investments, we have been getting less than 20 percent from the United States in recent years; Japan brings in more than twice as much.
Together, a 10-percent drop in our merchandise and services exports to and direct investments from the United States would clip off about 1.4 percent from Philippine GDP.
Remittances
Remittances are constantly cited to be our economy's lifeline, and the United States accounts for half of the total. Past experience tells us that a drop in US income or GDP will not necessarily translate into a commensurate drop in remittances.
But if one assumes that a 10-percent GDP drop passes through as a 10-percent drop in remittances from the United States, our GDP would go down by an estimated 0.4 percent.
Taken together, a 10-percent across-the-board decline in our main links to the US economy would directly pull down our GDP, hence total incomes, by around 2 percent.
To this, one must add the indirect impact through our other dominant trading partners who will also slow down as a result of a US recession.
But while Europe could slip into recession as well, Japan, China, India and most of Asia are expected to merely slow down, i.e., still grow, but at a slower rate. Thus, these second-order effects on us will not be as strong as the direct impact assessed above.
Ordinary Filipino
To the ordinary Filipino, what directly matters is how a worst-case US scenario, i.e., one without a government bailout, would affect prices, jobs and incomes.
As the Asian Development Bank has warned, it is not so much the US financial meltdown that directly threatens the welfare of Asians, but the rapid rise in prices due to recent oil and food price surges worldwide.
The silver lining from a US recession would be the drop in oil prices it is likely to induce, as has indeed been happening already.
Food prices are also easing as the fall harvest comes in, and as costs of petroleum-related farm inputs like fertilizer also respond to more moderate oil prices.
Jobs, incomes
As to jobs and incomes which are normally directly related, the above assessments point to a slowdown by about 2-3 percent in the absence of a US bailout.
But even here, we could cushion job losses if we do certain things right, including stronger decentralization of agricultural development, wider support for small-and- medium-enterprise development, and easing up on the aviation policies that have impaired our accessibility and attractiveness to foreign tourists.
Agriculture and tourism, after all, are the most promising sectors for employing our close to three million jobless, who statistics show to be predominantly young and relatively undereducated.
All told, a good and fair US financial bailout program is something that should be welcome to all Filipinos. But how we fare in the years ahead, with or without such bailout, largely hinges on what we and our own leaders do for ourselves as well.
(Cielito F. Habito, an economist, served as the socioeconomic planning secretary during the Ramos administration. He is a Philippine Daily Inquirer columnist.)
