Graphic by Jessica Bowie/Gulf Breeze News Has the Wall Street bailout and fluctuating markets got you pulling your hair out? When the country goes into recession, the Florida Panhandle is the best place in the nation to live, according to Dr. Rick Harper of the Haas Center for Business Research and Economic Development in Pensacola.

"We won't feel a recession as strongly or as quickly as some parts of the country," Harper said last week.

"The military payroll helps keep things rolling here, and health-care spending will continue

here. A lot of the health-care spending flows through Medicare and

Medicaid, which is good for Northwest Florida. We have a lot of health-care facilities of all kinds, all along the Panhandle," Harper said.

"Plus, we are a value destination tourism spot, so families will throw four people in a car and drive here for our beaches instead of spending $600 to $800 on air fare tickets to go someplace else. That will also continue to help us."

The slumping economy has been the country's biggest issue for months. For more than a year, the real-estate industry has been in crisis. Foreclosures have affected millions of beleaguered homeowners.

Sky-high gasoline prices experienced during the summer recently have retreated to the $3 range. But a meltdown of the world banking industry and a $700 billion bailout of Wall Street have caused the stock market to plummet. Millions of people are watching their retirements vanish into thin air, and some economists are predicting a depression worse than that experienced in the 1930s.

Harper said if the federal government had not done something three weeks ago to unfreeze the credit market, the crisis would have trickled down to the local area within a matter of weeks.

"They didn't have a choice; something had to be done. It was a necessary evil. They had to put in place a Troubled Asset Relief Program, as we call it," Harper said.

"Not doing something because people were mad at Wall Street would be like saying 'there is an investment banker in the middle of those widows and children, so let's throw a grenade into the crowd to get the banker,'" Harper said. "The credit markets were already frozen. Something had to be done. They had no choice."

Banks' hands are tied

Chandra Toop, Residential Lending Officer for People's Bank in Gulf Breeze, said the only credit problems her branch has seen over the past several weeks involves loans for large properties.

"I have a couple who wants to buy a condominium on Pensacola Beach," she said. "They have enough money for 20- to 30-percent down, they have great credit history and plenty of income proofs. And they have plenty of money left over to furnish the home after they buy it. But we cannot get them the loan," she said.

Toop explains such loans are not held by the local bank.

"Community banks like ours loan money from their deposits," she said. "So when someone wants to purchase a property that is $1 million or so, then we sell that loan to a bigger lender before we even hold the closing locally. We have the loan's buyer lined up so the day after we close, we sell the loan to them. Washington Mutual used to be one of those buyers, until about a year ago. We knew a year ago they were getting into trouble when they stopped buying loans."

Toop said she cannot find a buyer for the loan on that Pensacola Beach condominium, so she cannot close the deal.

"In situations like this, we have a good solid buyer, with squeaky clean credit and a seller ready to sell, and we cannot get it done because no one wants to invest in that kind of loan," she said. "After the last rash of hurricanes hit Florida — like Ivan — the large bankers and investors became more leery of buying loans on beach property. It got more and more difficult to find anyone to buy the loans until now it seems impossible."

Harper said that offers a perfect picture of the credit crisis.

"That is an example of what happens in a credit freeze," he said. "It is a perfect example. And that credit problem would work its way down to the smaller credit issues people deal with every day. Businesses would have problems getting credit to run their businesses, and only people with really good credit and substantial down payments would be able to do things like buy cars.

"Pretty soon, people would feel it, like when the car dealerships start not being able to get the loans to buy cars to put on the lots to sell. It isn't just the consumer not being able to get the money to buy a car, or not passing the credit test, it is the car dealerships not having the cars to even sell. Things like that would show up soon if the government didn't do something," he explained.

But the $700 billion 'Rescue Plan' approved by Congress isn't going to make things stable again overnight, Harper explained.

"It is not yet taking effect," Harper said. "They are putting the plans into place over the next several weeks. But the $700 billion plan, along with what the Fed, the European Central Bank (ECB), and other banks did (last Wednesday morning) shows they are bringing out the heavy artillery around the world. My expectation is that these moves will restore credibility in the financial markets over the next several weeks."

Mess started in 1990s

Even though the government did approve a $700 billion rescue plan for the economy, as well as some other financial initiatives, the stock market last Monday, Oct. 6, dipped below 10,000 — the lowest in four years.

By last Friday, the Dow Industrial Average had fallen by 1,874 points, or 18 percent. The Dow dropped below 8,000 during last Friday's trading, a day that saw a fluctuation of more than 1,000 points.

In eight days of trading including last week, the Dow lost 22 percent - or $2.4 trillion — of its value.

"We don't know how bad it would have been if the $700 billion package had not been approved," Harper said.

On Monday, the Dow skyrocketed 936 points, the largest single-day gain in history.

Harper said the economy of 2008 got into this mess because of three main reasons.

"Accessible lending with lax regulation combined with very low interest rates," he said.

"It started in the mid-90's. For example, in 1992 the median down payment for a home anywhere in the country was 20 percent, like it had always been. And you had to show proofs of income and have a good credit history. In 1994, the median down payment for a home was 3 percent, with much looser income proofs required. That's when the administration and HUD put pressure on Fannie Mae and Freddie Mac to loosen the standards by which they gave home loans so more people in lower income areas could become homeowners."

He said as people took on home loans they could not afford, and began to default, the larger banks that bought the 'bad paper' started having more bad assets on their books than good assets.

"It was only a matter of time before the balance sheets tilted to cause a problem for even those investment banks to get money and investors," Harper said. "It could have happened any time — this month, last year, next year."

The warnings sounded by Federal Reserve Chairman Alan Greenspan to Congress in 2003 and again more warnings in 2005, along with proposed legislation introduced in 2005 to regulate Fannie Mae and Freddie Mac, were ignored by Congressional leaders.

Harper said now the federal government will use a 'reverse auction' to get the 'bad paper' off the books of the private corporations holding them.

"A reverse auction is where the government will come in with some of that $700 billion and start offering to buy the bad loans at fire-sale prices — like they will say, 'OK, I have a dollar here, so who will sell me their bad loan for 35 cents on the dollar?'

"If there are no takers at that price, then they will start going up, like to 40 cents on the dollar. They will probably end up buying the bad loans at about 55 to 65 cents on the dollar," Harper said.

"Right now there is no buying or selling going on amongst the banks themselves. They are waiting to see what the market rate for that bad paper will be. Once the government starts buying, that will set the market price and the banks will start buying amongst themselves again," Harper said. "When Merrill Lynch was selling the company a couple weeks ago, they sold off their mortgagebacked securities for 22 cents on the dollar. That is a fire sale," Harper said.

"Then the government will hold on to those loans and decide when to sell them — when the market liquidity starts flowing again. They may hold onto some until maturity, which would bring them a lot more than 55 cents to 65 cents on the dollar. Ideally, with this set-up, the taxpayer should not have to be on the hook.

"If the government ends up paying too much for these bad loans, like 85 cents on the dollar, then the taxpayer might end up footing the bill in the end, but that is not expected to happen. But this will get the toxic loans off the books in the private sector and allow new money to get pumped into the banks."

Last week, the world markets started feeling the effects of the U.S. credit crisis.

"It's affecting world asset markets because they bought into our troubled mortgage assets at least to the extent that the U.S. banks did, if not more," Harper said. "Our banking and financial systems are now completely intertwined."