As a senior member of both the Senate Banking and Joint Economic committees, Sen. Bob Bennett, R-Utah, is watching the current economic meltdown and bailouts of financial institutions as an insider.
How bad does he predict it all will be?
"My own guess is that it will take longer and be more damaging than the recession in 2000" that came after the Internet-company bubble burst, he said Thursday. "But it will not be as long nor as deep as the recession following the 'great inflation' of the Jimmy Carter years" of the late '70s and early '80s.
And Bennett said it will be nowhere near as bad as the Great Depression. "What is happening today is vastly different than 1929," he said, as he celebrated his 75th birthday on Thursday so he has seen many economic ups, downs and recessions.
Bennett said he hesitates to predict how long current economic problems will persist, "but I think it will be less than a year. How much less, I don't know." He added, "Will we see more bank failures? I don't know."
He likened the current economic situation to treading water while trying to move toward shore. "While you're treading water, you don't know if the water beneath your feet is 2 inches deep or several yards. You just keep moving toward shore and hope your feet will touch bottom soon."
Bennett said that since World War II, recessions come about every six to 10 years. "But we forget that fact. We think that once the Dow goes up, it will always go up, and once housing prices go up, they will always go up." He said the current recession is "almost all related to the housing market."
He said "in cold economic terms," it is a "correction of unsustainably high housing prices" in many regional markets. When housing prices began to drop, the market value of homes often became less than what is owed on a mortgage.
Vastly complicating the matter, Bennett said, is that mortgages had often been divided into pieces and resold to investors through "derivatives." In what he says is an oversimplification, Bennett suggests imagining someone buying the revenue portion of a mortgage while someone else buys the principal at a discount.
He said mortgages were "sliced and diced" into many more complicated derivatives "so that pieces were included in financial packages scattered all over the world." Bennett said Congress and others did not see the current difficulties coming because they did not see how complex the derivatives had become, nor exactly who held them and the danger that collapsing real-estate prices held.
He said when auditors of investors and regulators began looking at the paper held by banks used to leverage the capital they were lending, they found much of it was not worth what it was listed on the books because of drops in real estate values.
Bennett said that resulted in a "confidence crisis" where many banks could not raise the capital they needed, which led to a "liquidity crisis." He said many banks had to downgrade the value they had on their investment portfolios.
Bennett said the current crisis will end when institutions and others feel the value placed on investments held is more than the face value of mortgages.
Bennett said one reason he feels the problems could end within the year and a reason why it is different than 1929 is "there is a lot of money sitting on the sidelines." He feels that banks will reach a point where investment in them is such a good, discounted deal that it will attract some of that currently sidelined money and end the major problems.
"After the emotion of watching Wall Street have its problems, people will ask, 'What is the safest economy to invest in?' It is still the American economy," Bennett said.
He said bad actors have disappeared now, such as those who urged people to take out interest-only mortgages with big balloon payments due in a few years contending homes could be sold at increased value to pay for it. He said the marketplace has also learned to be careful with derivatives.He said, "When it is all over and it will be all over you will see the American financial structure emerge stronger than it has been."