Market falls by a shocking $1.2 trillion

Shockwaves are reverberating around worldwide capital markets. Response of Wall Street to the failure of Congress to pass the $700 billion bailout measure designed to prevent the collapse of the credit markets was staggering.

The US stock market lost nearly $1.2 trillion in value on Monday, September 29, 2008. The one day loss in value of stocks was considerably higher than the $700 billion requested in the bailout measure.

The decline in the Dow Jones average of 778 points was the most ever in a single day surpassing the previous record of a drop of 721 points in the aftermath of 9/11 terror attack on America.

World financial markets were rattled as they tried to shore up the banking system by pumping billions of dollars of new money to keep credit flowing in their economies. The US Fed offered nearly $620 billion to other Central banks to help them out in this severe credit crisis.

Credit is the life blood of our economies and as lending dries up so does the economy.As banks have become increasingly fearful of lending to each other and tightened their lending criteria money  has become scarce. Hence the concern of the US Federal Reserve Bank. The Bank wanted to make sure that other economies had enough credit to keep their economies functioning. It is a full fledged global financial crisis now.

The financial implosion is not just  decimating Wall Street it is also taking a  toll on Main Street. After all Wall Street and Main Street are joined at the hip. As credit becomes scarce families are unable to finance their autos, fund student loans, finance home loans, and purchase furnititure and appliances. There is also the meltdown of our IRA’s and retirement accounts. Many of my friends are scared to even look at their shrinking portfolio statements. The American Dream is begining to erode.The pain on Main Street  is obvious and widespread.

Businesses are  facing difficulties in meeting their payrolls, building up inventories,expanding their shops and plants, and investing in new technology. If the crisis continues further  businesses will close down and lay off their employees at rates faster than what they have been doing in recent months if credit availability worsens. Small businesses are begining to pay a heavy toll due to the worsening economic and financial connditions in the U.S.

Implications of the financial crisis are obvious.The weak economy may slide into a full fledged recession in a matter of weeks if immediate action is not taken to instill some confidence in the market.

It is critical that the bailout measure which has now grown to a document of several hundred pages instead of the initial three pages with modifications be approved as soon as possible. Hopefully it will be approved by the end of this week by the House and the Senate.

There is little doubt that the passage of this measure alone will not solve our economic and financial ills.There is a long list of problems that need to be addressed.We need to revitalize and renew the economy if America is to live up to its potential as one of the economic leaders of the world in the 21st century.

Passage of the bailout measure is akin to applying a bandaid to a severe injury. They are necssary to stop the bleeding temporarily. We need a cure and not a short term fix.

In my next column for the Media News group to be published on September 7, 2008, I will talk about what we need to do revitalize our economy.

Who will bail out Uncle Sam?

We are in the midst of the most serious financial crisis since the Great Depression of the early 1930s. It all began with the housing bubble and subprime loans. Wall Street got into this mess by betting recklessly on real estate via the purchase of subprime loans. Lack of due diligence, euphoria, and a casino mentality were the problems behind the debacle.

What was unthinkable has happened. In March 2008 there was the rescue of the fabled Wall Street investment bank Bear Stearns by JP Morgan Chase with billions in help from the Fed. Many experts thought that this was the last of our Wall Street problems.

But that was just the beginning. In a matter of weeks we witnessed the takeover by the U.S government of mortgage giants Fannie Mae and Freddie Mac. Both were at the brink of disaster. This shocker was followed by the bankruptcy of 158 years old Lehman Brothers, followed by the quick sale of Merrill Lynch  to Bank of America.

It was hard to believe that in a matter of a few days two of the largest investment banks in the world became history. Then came another shocker – the bail out of the world’s largest insurance company, the $1 trillion American International Group (AIG) via an $85 billion loan from Uncle Sam.

More surprises were in store. The administration decided to solve the imploding credit crisis in one swoop. The mother of all bail outs, a $700 billion plan, was presented to the U.S. Congress on Monday, September 22, ’08 by the U.S Treasury Secretary, Henry Paulsen. It involved the creation of a fund that would buy out toxic loans from banks. The idea is to soften the credit crisis and restore confidence in the financial system.

The underlying concern in framing this proposal was that the meltdown of Wall Street poses great risks for Main Street. Credit is the life blood of our high spending market economy. Disappearance of credit would mean that consumers and businesses will not be able finance their spending and investments. That would result in a further worsening of the weak US economy, continued disappearance of jobs, and further delay in the recovery of the housing sector.

Congress has expressed concern about writing an enormous blank check with tax payer money to Wall Street without fully examining the plan. Specific concerns in congress included independent oversight of the fund, help for homeowners facing foreclosure, limits on executive compensation of firms seeking help from the plan, and the value of what the government will be buying. An additional issue is taxpayer ownership in the banks selling their bad debt to the government.

Most economists agree that the current situation is too risky to just leave it to the market and the Paulsen intervention is necessary to avoid huge problems down the road. The debate is about how to do it. There is much concern that the bill will serve private interests at public cost.

I expect that this bill will pass in a matter days. With national elections coming in a few weeks and the congress getting ready to adjourn for the fall elections the sense of urgency is acute.

My questions at this point are:

· Who will be bailed out next? The auto companies?

· Are there more shocking surprises like the ones we have experienced in the last several weeks?

· Is $700 billion too little, or is it too much?

· Value of what the government will be buying?

· What will be the economic consequences of the bill?

· What is in the bill for Main Street

· Are we drifting into an era of state capitalism?

· When do we say enough is enough?