I've heard a lot of complaints from both liberals and conservatives about the proposed $700 billion bailout of troubled financial institutions. Most people are justifiably apprehensive about throwing that much taxpayer money into buying bad assets. Many great progressives have said that we need to bail out "Main Street" through mortgage payment assistance to homeowners. Others have said that we shouldn't reward those who greedily made risky investments.
These are legitimate concerns. But the conclusion some draw from these concerns is problematic. A great many of Kossacks (maybe the majority) oppose the bailout that just passed the Senate as an amendment to a larger bill. These people argue as if refusing a bailout is an appropriate way to discipline those who got us into this mess. They assume that "Wall Street" and "Main Street" are two distinct entities. The truth, however, is that all of us, whether we're rich, middle-income, or poor, are affected by the unhealthy housing market, the failure of financial institutions, and the bleeding of the credit market.
Do you have a 401k, IRA, or other retirement plan? Are you depending on investment returns as a source of income after your retirement?
Are you a student or the parent/guardian of a student who will have to apply for a loan in the future?
Do you own a house?
Do you plan on taking out home equity loans in the future?
Do you pay for homeowner's insurance? Auto insurance? Medical insurance? Life insurance?
Do you work for a business that borrows money for payroll, expansion, overhead expenses, etc.?
If you answered "yes" to any of these questions, then you will be directly and negatively impacted by the failure of the federal government to provide liquidity to troubled financial institutions.
Retirement
How long have you been saving for retirement? Chances are, if you have invested in a 401k retirement plan, you have lost or are at risk of losing a significant amount of retirement savings due to the devaluation of your investments. Think that you made safe investments in large, stable corporations? Think again. Fannie Mae, AIG, Lehman Brothers, Washington Mutual, Wachovia, Bear Sterns - all were major powers in the market that saw their stock value plummet during this crisis. They were once safe investments, but in a volatile market nothing is certain. Ripple effects touch anyone and everyone who are exposed. You can be sure that failing to pass a bailout bill will only worsen retirement savings losses.
Education
I'm a college student. My parents are both teachers who make just enough to disqualify me for federal financial aid but not nearly enough to pay for my education at a state university. Therefore, I am in debt due to student loans. Where do you think the money for student loans will come from if we sit idly by as the institutions that fund such loans fail? What do you think will happen to interest rates on these loans?
Homeowners
Unlike the wealthy, who can afford luxury cars, yachts, hedge fund investments, etc., middle class families derive their wealth from one primary source - home ownership. Owning homes is necessary for a strong middle class. But the recent crisis has caused a vast decrease in the value of this source wealth. When the value of homes decrease, the wealth of the middle class decreases. Home equity loans become few and far between. Without the bailout, the institutions that own the mortgages on these homes will be forced to sell defaulted homes at firesale prices on the market. This will further drive down the price of your home.
Insurance
Insurers like AIG who were involved in credit default swaps are often large corporations that sell and invest in other types of insurance. So when the CDS market collapsed due to the high number of defaults, these insurers lost liquidity. AIG was on the brink of bankruptcy before the Fed rescued it. The cost and availability of other types of insurance will be hurt if the institutions offering that insurance collapse. That's common sense. So if you depend on insurance, you have a vested interest in having bad assets taken off the hands of insurance firms. The bailout is important to you.
Business Borrowing
If you are employed, there is a good chance that your employer depends on loans for a variety of financial needs. Among them are property expansion, operating costs, and payroll. If your employer is unable to obtain a payroll loan, your paycheck can be deeply affected. The rates and availability of these loans will be negatively impacted should a bailout fail.
These are just a few problems that would be directly worsened by the failure of Congress to pass a bailout bill. The indirect effects will reach out and touch every consumer in the American (and probably the world) economy.
Is the current bill problematic? Yes. But it is the result of compromise, and we cannot expect a great bill to emerge in the amount of time that this one took to formulate. We don't have the time to bicker while the U.S. economy burns.
As the House rejected the original bailout plan on Monday, the Dow Jones Industrial Index lost 7%; $1.2 trillion was erased from the American economy during that drop. Time is of the essence here - the longer we wait, the more equity will flow out of the American economy. Main Street cannot escape the failure of Wall Street. Our economic survival is very much dependent on the health of the financial institutions that we depend on in our everyday lives. So next time you push for a rejection of this bailout, consider what is at stake.