This is my first diary post! Here goes :)
I work as an attorney in the arena of business loans. It's interesting stuff - and I've always felt relatively good about doing it because it's the heart of our nation's economy. These are the loans that manufacturing companies take out to build new factories, schools use to buy new school buses, that hospitals take out to upgrade their emergency rooms, that retail business take out to purchase merchandise as they gear up for the holiday season. When business loans are being made, almost always good comes out of it to local communities. But right now, business loans are not being made, and that is very scary to me.
When business loans are made, jobs are created, services are improved, factory orders increase, capital improvements get made. The economy keeps humming along. Some relatively stable businesses that have uneven cash flow (for example, seasonal businesses or businesses that rely on 3rd party reimbursements), may even rely on business loans to make their regular payrolls.
If business loans get cut off, the economy freezes. And this is exactly what's happening right now. Commercial banks in this country have taken massive hits. We all know about what a fiasco it is, so I won't get into that. What I'm focused on is the impact on Main Street.
Everyone is asking, "Why do we need this bailout of Wall Street? Why such a rush?" To the ordinary person, it may look like everything's relatively normal, except for the stock market being down.
The truth is, behind the scenes, the business loan market has completely tanked. Banks are responding to the current crisis by hoarding cash, refusing to grant credit to businesses and raising interest rates. What does this mean to the average community? Let me try to describe it. The cost of your local school bonds goes up with the interest rate, so the school budget takes a hit, and the school district has to cut back on transportation or lay off teachers. That new drug store they were building in town? As the funds to build it dry up, work crews are sent home and it turns into a rusting eyesore. That used car you needed to buy because your old car just died? Well, the dealer can't offer you financing anymore, because their business line of credit has been cut off. So you have to shop around to a bunch of banks and end up paying a lot more every month in interest. How about your job security? As business activity goes down, layoffs go up.
Sure, you say, this is what happens in a recession. We've lived through this before, we'll live through it again. True, but this feels different. Even in a recession, banks put money out the door. They just tighten their credit standards. Right now, they're desperately holding onto every penny they've got. They don't even want to loan to each other.
You know how the Republicans are always touting "trickle down" economic policies? That theory has been basically debunked now, because the amount that "trickles down" never comes close to what they promised. But my question is, what happens to Main Street if the trickle down from Wall Street is completely cut off?
UPDATE:
I read some news online while getting ready for work this morning and found some descriptions of the urgency of the situation that made it worthwhile to update my original post:
David Brooks writes in today's NY Times:
"Now we’re looking into the abyss... Credit markets have frozen almost solid, banks are toppling like dominoes and brokerage houses are vanishing like props in a magic act."
Go here for the full op-ed: Madmen Reign
The NYTimes editorial board asks "What's Worse than a Flawed Bailout?":
"The question now is whether the stock-market plunge that followed the House’s failure to lead — and a renewed credit freeze — will be enough to get the 133 Republicans who voted against the measure to change their minds. And, more important, whether the damage that the no vote has inflicted is readily reversible."
(emphasis mine) What's Worse Than a Flawed Bailout?
And this from Justin Fox at Time:
"By voting down the proposed $700 billion financial bailout package — and causing a spectacular stock market rout — a majority of members in the House of Representatives made a clear statement that they didn't want to put taxpayers on the hook for the failures of financial institutions. But there's a catch: taxpayers are already on the hook for the failures of financial institutions, and it's possible that the bill will actually be larger without bailout legislation than with it. That's because the regulators who mind the financial industry — the Federal Reserve, Treasury and FDIC — will keep doing what they've been doing: stepping in to prevent the chaotic failure of banks and other large financial institutions. This means continuing to put hundreds of billions of taxpayer dollars at risk, but in a way that adheres to no clear plan of action and doesn't require members of Congress to explicitly approve their actions."
(emphasis mine) Full article is here:Without a Bailout Plan, What Will the Cost Be?
Already feeling very uneasy, I arrived at work today to be greeted by this email from our HR department regarding our employee 401k plan:
"[W]e wanted to re-assure all [Retirement Plan] participants that the assets in the [Retirement Plans] are not assets of either [our bank] or [our bank's parent holding corporation] and are not subject to the claims of their creditors in the event that [our bank] or [our bank's parent holding corporation] were to become insolvent or commence a proceeding in bankruptcy."
Instead of reassuring me, this made my stomach do flip flops, since I hadn't even contemplated that my 401k could be at risk (aside from a huge hit in value from the stock market plunging). The other thing that really surprised me, is that the bank that holds our 401k is not even one of the banks that has recently gone under - it's another major bank.
These are truly worrisome times...