Ask an Economist: Breaking Down the Financial Crisis - Page 2 of 3

Ask an Economist: Breaking Down the Financial Crisis

Mac. I doubt very seriously whether it will revert back to its previous form, but that’s a question that will await the new administration in Washington.


How do these government bailouts affect taxpayers? How will the financial crisis affect average Americans?


Preserving those institutions will protect small investors. It won’t cost tax payers anything unless the strategy fails. If the company cannot be turned around, if it cannot begin to generate revenue and pay its bills, then federal government will come in and pay the bills. That will increase the federal deficit. It will put greater pressure on the economy because federal money that would otherwise be used for building highways, or supporting education, would now be used to pay debt holders of the private corporations.


What type of ripple affect will the current bailouts have for the job market and other parts of the economy? What part of the economy will be most affected?


We have two problems; we have a liquidity crisis and a credit crunch. Begin with the assumption the businesses run on credit. If the business cannot barrow money to operate, that business will have to cut costs —they cut production, they layoff people, they put people on part-time schedules. If that happens, then what you will see is a decline in consumer spending. If Wall Street begins to affect the American economy to greater degree then we’ll move from slow growth into a recession.



Will the events of the last week and a half affect the way J.P. Morgan Chase, Goldman Sachs, and other large financial institutions operate?


I would suggest there’s a danger because as a result of the adjustment to this crisis, we’re getting fewer financial institutions. That leaves far fewer financial institutions on Wall Street, I’m not sure that’s a good thing. Competition is good, consolidation and a move toward monopoly or oligopoly, I don’t think is good. I would be concerned about the drift of events which would lead to the further reduction in the number of financial institutions that are competing on Wall Street.


Sens. Barack Obama and John McCain have both proposed increasing the regulation of financial services companies, and investment banks, how will these efforts help fix the current