American investors, as well as investors in stock markets throughout the world were mildly alleviated from panic when the Senate approved Bush’s $700 billion bail-out package yesterday, October 1, 2008, after it was rejected by the House of Representatives two days prior on September 29, 2008.
Although the proposed Bush administration’s bail-out plan is aimed to lessen the blow of the pending American financial crisis, it is important to note that this package in no way will avoid the imminent recession in our economy’s future. More emergency rescue plans, tighter lending markets, and numerous bank failures are most likely in America’s future. This disaster will spread not only from Wall Street to Main Street USA , but will spew overseas to Europe. This increasing contagion is partly due to the public, as well as the policymakers who represent it, failure to understand the grandiosity of the financial crisis.
American banks such as Washington Mutual and Wachovia are not the only ones involved in the pending financial disaster. Earlier this week, Germany’s second-largest property lender, Hypo Real Estate, faced an emergency rescue, arranged by the government, of the equivalent of a $51 billion loan from both the government and banks. Four other European banks received emergency rescue loans including Britain’s Bradford & Bingley, Iceland’s Glitnir, Fortis, and Dexia; the former received financing from the Netherlands, Belgium, and Luxembourg while the latter received financing from France, Belgium, and Luxembourg. Moreover, some argue that European banks are more susceptible than their American counterparts because of higher lending amounts per deposit denominations. This means that in order to compensate, European banks must rely on now wary investors in money-markets. Unfortunately, the crisis has spread beyond America and Western Europe to banks in Russia, India, and Hong Kong. Therefore, the financial crisis has truly reached a global status.
So what does this mean? Credit will continue to slow through markets to banks, businesses, and consumers. Banks are now hoarding their cash and charging other banks extremely high rates to borrow from one another. This affects business’ survival through higher interest rates on present loans and denial of loans in the future. Businesses, in order to pay off some of their debt, cease new investments or projects and cut down on costs partly by means of job lay-offs, which trickles down negatively affecting consumers. Consumers will then find that loans are extremely expensive if even attainable and find themselves forehead deep in a recession.
Although the crisis was supposedly initiated here in America, it is up to the coordinated efforts of governments around the world to pull everyone out of this mess. Consumers, businesses, and banks need government intervention at times.
If you find yourself affected by the lack of freely flowing credit through the markets, banks, businesses, and consumers it may be time to reevaluate your personal finances. Creditors that may be offering lending will most likely lend to consumers with a great credit history.
