Wells Fargo exec says bailout, cuts will work

Fear has replaced greed as the dominant emotion on Wall Street, driving stock prices ever lower in a free-fall that has little to do with economic fundamentals, a top investment executive and economist with financial giant Wells Fargo & Co. said Friday in Colorado Springs.

The $700 billion federal bailout plan, moves by the Federal Reserve System to inject liquidity into the nation's financial markets and interest rate cuts made late last year "are a lot of (economic) stimulus. I believe it is enough to stabilize the financial markets and will eventually work," James Paulsen, chief investment strategist at Wells Capital Management, told 600 business and civic leaders at the Southern Colorado Economic Forum at the Antlers Hilton.

"At this point, this (crisis) won't end until the market goes down and (then) recovers all by itself in the same day. That will be the first step of ending this," Paulsen said. "What is different from crises in the past is that most have been driven three-fourths by economic fundamentals and one-fourth by fear. This one has been the opposite with fear driving three-fourths of it and economic fundamentals driving one-fourth. The problem is fear itself."

Paulsen said neither Bear Stearns Cos. Inc. nor Lehman Brothers Inc. were "fundamentally unsound, but were run out of business by fear" that left them with falling stock prices and unable to borrow money to avert their collapse.

Unlike past financial crises, "what happened to these companies could happen to any company" in markets that are now ruled by fear and panic rather than economic fundamentals, he said.

Rather than restore confidence, Paulsen said the debate over the federal bailout fed investor fear because political leaders indicated the U.S. economy was on the verge of collapse to persuade Congress the bailout was needed.

"I don't know that it was a smart thing to do. Telling us how bad it is has made it worse.

The perception is worse than reality," Paulsen said. "Every day the Dow (Jones industrial average) goes down 300 points and they come up with a new plan."

The nation's economy likely will benefit next year from a slowing in the rate of the decline in the nation's housing market, growing exports, lower interest and mortgage rates, falling oil prices and the removal of political uncertainty by the election of a new president, Paulsen said.

Stock prices now reflect the expectation of a three-year recession, which he said is unlikely, and are valuing companies at their lowest level in 25 years.

"In 1999, we had irrational exuberance, now we have irrational pessimism," Paulsen said.

"You have to hold your nose with all of this volatility. Just don't look. You are buying for where the market will be in three or four years."