Get your boxing gloves on because the fight is ON! It is Main Street vs. Wall
Street and in the latest round, Main Street has won. Despite the protests and
tens of thousands of letters, emails and phone calls to their Senators, Main
Street needs to realize that there are no winners if Wall Street fails. This is
a slippery slope and if Wall Street loses its footing, everyone else could fall
as well. This is not to say that I don’t agree that bankers need to be punished
for their extravagant risk appetites, but it is time to start thinking about the
consequences for the average American.
Overnight LIBOR rates, which is the rate at which banks lend to each other
hit an all-time high of 6.88 percent. This is 488bp higher than the 2% Fed funds
rate. The 3 month LIBOR rate is also above 4 percent. Since many home equity
loans, lines of credit, student loans, small business loans and credit card
rates uses LIBOR as an index, the rise in borrowing costs will be felt on Main
Street. The reason why the borrowing cost or LIBOR has surged is because banks
are not willing to lend money. With the bailout plan in flux, cash is one of the
most valuable commodities.
Here’s how Main Street will feel the pain if Wall Street doesn’t recover:
1. Evaporating Equity Market Wealth: $1 Trillion in market
capitalization was wiped out from the stock market yesterday. For the average
American who still has money in equities or has a 401k, the pain was certainly
felt. Year to date, the Dow Jones Industrial Average is down 19 percent.
2. Higher Mortgage Rates: There aren’t that many mortgage
lenders left in the market. Take a look at the rates that Wells Fargo is
charging. On a 30 year fixed mortgage, they are charging 6% for conforming loans
and a whopping 9% for jumbo loans. Home equity lines are being pulled by lenders
left and right as they try to shore up their own balance sheets and reduce
risks.
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3. Larger Job Losses: In addition to all of the companies
that have already gone belly up, we are in an environment where it is difficult
for corporations on and off Wall Street to borrow or raise cash. As a result,
they will start cutting back which means layoffs, hiring and project freezes.
These ripples will be felt by Americans either in the form of a direct job loss,
smaller raises and bonuses.
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