This week, many Americans called their Congressional offices to express opposition to the federal bailout bill.
Biting the bullet and holding onto free market principles is admirable. But those who think that the credit crunch will somehow spare non-financial companies, individual Americans, and regions far, far away from Wall Street are severely misguided.
In fact, the bailout bill’s biggest beneficiaries are average American like you and I, not Wall Street bankers.
In the 21st century, Wall Street has assumed the role of financier for governments, private institutions, and individuals. Banks provide liquidity and financing for businesses—large and small—around the world. Businesses require funding and credit for their daily operation. Waiting until after your customer pays you to pay the vendor is not a winning business plan.
Take a glance around your neighborhood. The McDonald’s franchise, the flower shop, the Dunkin Donuts branch, the local mechanic, and those stores at the suburban mall—all of them depend on banks, and the free flow of capital, for survival.
This brings us back to the woes plaguing the financial sector. The 2008 credit crunch has torpedoed big banks (Wachovia, Washington Mutual, and Lehman Brothers) as well as smaller ones (IndyMac), and is threatening to sink the entire industry. Banks we thought were too large to fail crumbled in front of our eyes; taking with them employees’ earnings and investors’ life savings.
A company’s ability to borrow cash depends on its credit rating, and when the stock market freefalls, the company’s access to cash goes down with it.
According to Standard & Poor’s (S&P), a major U.S. credit ratings company, stock performance is a major factor in determining a company’s creditworthiness.
“A company's stock price can be important in two ways. First, it can affect the company's ability to raise equity capital: When the stock price is very low, issuing new shares can become an ineffective strategy for raising capital,” S&P analyst Mark Adelman wrote in a report titled “How Stock Prices Can Affect An Issuer’s Credit Rating.”
“Second, sudden changes in the price of a company's stock sometimes signal abrupt changes in the company's fundamental condition or prospects.”
The negative effects of a company’s stock price are even more detrimental for financial companies.
“For [financial services] companies, investor sentiment and the willingness of trading partners to extend transactional credit are like oxygen: they must be present for the firm to operate,” Adelman said.
Collateral Damage
A devastated financial services industry will usher in poorer returns across the stock market, spreading collateral damage to non-financial sector companies.In a Department of Labor report released this week, initial filings for jobless benefits increased by 32,000 in the third week of September. The jump marked the highest unemployment increase since Sept. 29, 2001.
So far, most of the reported job cuts are from within the financial industry. But if the credit market disaster isn’t addressed, it’s only a matter of time before other businesses experience slowdowns.
Businesses may be forced to cut down spending, promotions, marketing, salary increases, and most importantly, future expansion. Consider the alternative—factories would be unable to purchase machinery or make capital improvements, retail stores would be unable to stock up goods prior to the Holiday Shopping season, and small business owners would be unable to secure that business loan to purchase their first batch of inventory.
Companies across all sectors have reported slowing business and revised their projections downward.
According to a Department of Commerce report, orders for durable goods recorded the largest decline in seven months in August, a drop of 4.5 percent. The report measures business purchases of durables, typically defines as items built to last three years or more, such as automobile, aircraft, and machinery. The report is considered by economists as a gauge of manufacturing output.
On Monday, electronics retailer Circuit City Stores Inc. reported a second quarter loss of $239 million, citing sluggish sales and poor customer flow. The company also withdrew its 2009 projections.
High-end retailer Lord & Taylor department store chain announced a management shakeup ahead of the 2008 Holiday Shopping season. Retailers across all industries expect 2008 to become one of the worst Holiday Shopping seasons in recent memory as consumers cut back on spending over fears of an economic recession.
Lost Tax Revenues
Local, state, and federal government agencies and programs will face lower tax revenues in the near future. New York State comptroller Thomas DiNapoli on Monday reported that the Wall Street crisis could cost the state up to $3.5 billion in tax collections over the next 18 months.Revenue decreases will be felt countrywide, and could negatively affect municipal infrastructure upgrades, public works, and governmental services.
“It is clear that the implications for the national, state and local economies will be substantial,” DiNapoli said in a statement. “Consumers, already under pressure from higher energy and food prices, will now have to weather the effects of this financial institution crisis.”
All of the above means that a prompt passage of a federal aid plan will be imperative for economic stability—in New York as well as in Kansas.
Some opponents of the federal bailout bill cite a need for maintaining the free market capitalist system. But without proper regulatory enforcement (the SEC, we’re referring to you), our current laissez-faire policies of market self-regulation have allowed unethical lending practices and corporate greed to fester for too long. This bill is far from the ideal solution; but during this time of crisis, there are few—if any—alternatives.
To bail out Wall Street is to bail out Main Street. To bail out Wall Street is to bail out middle class Americans, teachers, service workers, union members, professionals, and senior citizens. A failure to stem the current market crisis may wipe out retirement plans, pension funds, mutual funds, and life savings of average Americans.
