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.