There is a lot of public anger on the $700 billion dollar bailout that is being proposed by the Bush Administration. The typical reaction is why bail out well-paid fat cats on Wall Street, who are responsible for the current mess anyway. While it is an understandable response, it is only a matter of time before the crisis deeply affects you and me.
A good illustration of the potential trouble we are in is told is this story in the New York Times:
In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.
A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.
We may not own a store in New York or work on Bay Street but it is a good bet that sooner or later, we’ll be needing credit to buy a car, a home, send our kids to school or to expand our business. There is plenty of evidence that the credit crunch is already hitting close to home. The discount off prime offered on variable rate mortgages started shrinking last year and is now disappearing completely. A new home owner taking on a $200,000 mortgage is already paying for the credit crunch to the tune of $1,000 annually (assuming she could have otherwise obtained a 0.5% discount). There is some evidence that the crunch is affecting small businesses that require credit to run their day-to-day operations.
The bailout also doesn’t mean banks or institutions that were reckless shouldn’t pay the price. The shareholders in every single failure so far were mostly wiped out (It is a different story that senior management made out very well when the times were good). Unfortunately, everything that happens on Wall Street, doesn’t stay there. If nothing is done, it is simply a matter of time before the credit crunch spills into the broader economy and we’ll all end up paying a price anyway.