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Wall Street’s Worst Week Ever

September 15th, 2008

Just another manic Monday? No quite. Lehman Brothers is bankrupt. Merrill Lynch is being swallowed by Bank of America. Bear Stearns is already dead. Other major financial institutions such as insurer AIG are teetering on the brink.
What does the tarnishing of these storied names mean for the rest of us? No doubt there are some people out there who are probably happy all of these overpaid financial wizards are finally getting their comeuppance. Like them or not though, Lehman, Bear Stearns and Merrill Lynch and other investment banks provided the capital so that millions of Americans could buy homes, cars and boats and just about anything with a credit card. That was the miracle of securitization.
Now that this credit spigot is running dry, what will it do to the national economy? Ed Leamer, a respected economist with UCLA’s Anderson School of Management, says the immediate impact of these big investment bank failures is not as powerful as one would think. The consumer has already cut way back in spending, taking as much as a full percentage point off of GDP growth. “That’s behind us,” Leamer says.

Next will likely come a slow down in business spending. Since fewer people are buying cars and washing machines the companies that make them will continue cutting back. The fortunate think is that these two pillars of the economy, consumers and businesses, didn’t go south at the same time. “We’ve been in a zero growth economy for some time,” Leamer says.
The bad news is there is no new economic engine like the dotcom boom or housing on the horizon. But continued growth in population, healthcare and schools keeps the economic train rolling along.
There’s a psychological blow to hearing that such storied institutions have been hobbled. But a far greater impediment to consumer confidence has been soaring gasoline prices, Leamer figures. "They're reminded of that every time they fill up the tank," he says. And with oil down below $100 today, there is a least some bit of good economic news out there.

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