WASHINGTON — Average Americans have a lot at stake in how the financial crisis plays out. Here are some answers to questions about it.
Q. What does all this Wall Street volatility mean to me?
A. If you have a 401(k), shield some of your income from taxation through an IRA or have a lot of your retirement savings in stocks, you’ve already seen a sharp drop in the value of your nest egg. The Dow Jones industrial average is on pace for one of its worst years ever, but even if you’ve parked your cash in a bank, today’s rising inflation is eroding its value.
Q. Is this like 1929, when the stock market’s crash led to widespread bank failures and the Great Depression?
A. No. The interventions so far by the Federal Reserve and the Treasury, the existence of federal deposit insurance for bank accounts and the willingness of Congress and the president to fight the downturn with fiscal policy all underscore that there are safety cushions in place that didn’t exist 80 years ago. Still, today’s financial turmoil could spread, and the economy could suffer more before stability returns.
Q. Will the collapse of Lehman Brothers make things worse?
A. It could, or it could make things better. The weekend meetings between top federal regulators and senior executives of Wall Street firms resulted in the surprise takeover of Merrill Lynch by Bank of America and a lack of suitors for Lehman. Some analysts feared a Great Depression type of financial-market meltdown Monday morning, but markets were orderly, not panicked, as news of the events sank in.
With the government-brokered sale of investment bank Bear Stearns in March, Bank of America’s absorbing of Merrill Lynch and the bankruptcy filing by Lehman, Wall Street’s weakest players have been pushed off the field.
Q. What about the shorter horizon?
A. Kenneth Lewis, chief executive of Bank of America, said Monday that he didn’t see the clouds parting for his industry until 2010. Banks that still have exposure to the complex mortgage bonds that are at the heart of the crisis continue to get hammered.
Q. Is there any good news for consumers?
A. Yes. One immediate consequence of Monday’s Wall Street earthquake is that oil prices sank sharply as investors fled anything considered a risky bet, despite Hurricane Ike’s disruption of oil facilities in the Gulf of Mexico. The price for contracts of next-month deliveries of oil fell almost $6 a barrel. If prices stay lower than $100 a barrel, inflation pressures should ease substantially. That means gas prices should drop in the weeks ahead.
Another positive is that pressure is rising on the Fed to cut already historically low interest rates.
Q. How do these banking-sector problems affect me?
A. Problems in the banking sector spill into the broader economy. As these complex Wall Street investments sour, banks need to keep more capital on hand to assure investors that they can weather any future losses from loan portfolios. That means banks are playing defense. If you want a business loan, a car loan, a home loan, a student loan or virtually any other kind of loan, they’re hesitant to lend, lest they wind up with more bad loans. With lending drying up, auto dealers are sitting with inventory they can’t move and real estate agents are showing homes they can’t sell. The economy is slowing as credit is squeezed, and the crisis feeds on itself.
