on October 1, 2008 by in Uncategorized, Comments (0)
When Wall Street bleeds into Main Street
CLEMSON — Left unresolved, financial market woes could severely impact consumer issues, including wages and student loans.
According to Clemson University economist Scott Baier, the wall between Wall Street and Main Street is crumbling.
“There’s a tendency to think they aren’t connected, but it’s come to the point now where that separation isn’t there,” Baier said. “Unless some action is taken, we’ll see the financial markets continue to lock up. The drag on the economy is already at elevated levels, and what’s happening in the financial section will spill into slower income growth and slower GDP (gross domestic product) growth.”
With Congress unable to pass a proposed $700 billion bailout over the weekend, Baier believes a distressed homeowners’ provision could bolster a revision.
“I’m not saying I approve of this, but it would make a bailout more palatable to the general population,” Baier said.
Baier said the failed bailout plan contained promising and bitter facets. The upside: The plan had the potential to allow American business to be conducted as usual. In addition, consumers could actually profit from the federal loans to troubled banks. Baier cautioned the latter possibility was remote.
Since the bailout failed to pass, the Dow Jones has zigzagged violently. The market was up 500 points Tuesday after a 777-point plummet Monday.
“Something needs to be done,” Baier said.
According to Baier, until a successful bailout is scripted, the already dissipating loan market will continue to shrivel. Beyond already crippled mortgage opportunities, other pivotal outlets, like student loans and auto financing, could also shut down. Businesses outside of the banking sector would also be unable to obtain credit vital to their operations, such as purchasing inventory.
An associate professor of economics at Clemson, Baier served last year on the Council of Economic Advisors, in Washington. All things considered, Baier said the U.S. economy has showed impressive resilience.
“Higher gasoline prices, higher food costs and the subprime mortgage problems, those are three pretty good shocks,” he said.
While media coverage of the bailout controversy has gobbled up copious airtime and news-hole, Baier said he believes the impact of mark-to-market financial devices has been lost in the shuffle.
Mark-to-market is the act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value. The technique can severely skew pricing, Baier said.
According to the Wall Street Journal, U.S. accounting firms are opposing congressional efforts to scrap mark-to-market accounting rules as part of a revamped buyout.