September 26th, 2008
How the Bail Out Affects Everyone
The popular sentiment right now is that the $700B government bail out is about Wall Street, CEOs, and in general, rich people. While the bail out will most certainly help the aforementioned, it has much larger ramifications on the general economy. To start, a failure in the financial system of this proportion will create a credit crunch. This means it will be harder to borrow money and when you do, you will pay much more in the form of interest and fees. We already see it in the mortgage rate tables with fewer loan options and rates that are higher than their historical ranges given other interest rates.
Recently, we are started to see the credit crunch begin to cascade to the credit card industry. We monitor rates and fees of approximately 200 credit cards. In the last few weeks, we have seen APRs increase. At the same time, we have seen fewer approvals for credit cards from people with similar credit as those who were approved months ago.
This trend will probably continue to cascade into other sectors: auto loans, bank fees, etc. if the government does not act. The collapses will also increase unemployment and further drag down the economy. The upside is that taxpayers don’t pick up the tab and that the large corporations get what they deserve.
It’s not our goal to take political positions on this bail out. There certainly were bad decisions, poor management at these financial institutions, and there needs to be accountability. However, as columnist Steven Pearlstein wrote “You can try to prevent a financial meltdown or you can teach Wall Street a lesson, but you can’t do both at the same time.” With that said, it is upon each of us to understand the issues, the ramifications, and then make an informed decision.
