On Monday morning the United States House of Representatives narrowly defeated what would have been the largest government economic intervention in the country’s history.
News of the $700 billion bailout’s failure sent shockwaves throughout the financial world with stock markets tumbling in New York, Tokyo, London and Toronto.
By the end of the day the Toronto Stock exchange had lost over 800 points on the S&P Composite index, (an average of the number of stocks and their value, traded during the day). In New York the Dow Jones Industrial Average (based on the 30 largest publicly traded corporations in the United States) plunged a record-breaking 777 points. One of the Dow Jones’ other indexes, the Wilshire 5000, a measure of all stocks traded in the States, reported paper losses of over $1 trillion on Monday alone.
While the current economic crisis is centered in the stock markets and giant investment banks, it will also affect the average Canadian.
“Whatever happens in the American financial markets affects the American economy and whatever affects the American economy affects the Canadian economy, simply because trade flows are so large across the border,” said McGill University economics professor Christopher Ragan. “If the American economy stays in a slump for another year because of what’s going on here . . . then Canada’s going to feel that. They’re going to be buying less lumber and they’re going to be buying fewer car parts and they’re going to be buying less of other things that Canadians make and sell.”
“We depend on the United States for a market for the stuff that we produce . . . Many, many, many of our industries depend on the ability to exploit the markets of the United States to stay alive here. We need those markets,” said Concordia sociology professor Beverley Best, who studies the economy.
The bailout’s failure could also affect interest rates charged on loans and credit cards. “What we’re seeing right now is that credit markets are seizing up, and so you’re seeing interest rates in short term credit markets rise significantly,” said Ragan.
Had the bailout passed, chief economist and chief strategist at CIBC World Markets Jeff Rubin also predicted the cost of goods would rise. “With fears of a financial system meltdown and growth collapse averted, prices for a range of commodities have already likely seen their lows,” he said.
Congress negotiated the bailout over the weekend, arriving at a deal on Sunday that won the support of President Bush as well as presidential candidates Barack Obama and John McCain.
However members of the Republican Party came out against the bill, two-thirds of them voting it down and causing stocks to start falling within seconds.
The bailout would have created “a big organization funded by the taxpayers that would buy up all of the bad debt that we can find in the financial markets, and that way we will keep credit flowing in the financial markets,” said Ragan. “Modern economies survive on the flow of funds and the flow of credits. So if we buy all of these bad assets up with cash, then all of the banks will have cash on their balance sheets, rather then bad assets which nobody trusts.”
But the financial markets crisis is affecting more than just North America, around the world financial industries are collapsing, and being propped up by governments. In the United Kingdom large bank Bradford & Bingley was taken over by the government, while in Europe three governments bailed out Fortis, a giant financial company. The Bank of Canada, along with central banks in the States, Europe and Japan have begun working on a joint plan they hope will put more money into the world economy.
“When we’re talking about investment banks, we’re talking about banks that lend out big sums of money . . . large sums of money for industry,” said Best. “Let’s say if you’re a company or a firm and you want to buy out a competing firm . . . very rarely do companies or industries have the kind of cash lying around for those kinds of big investments so that money is usually borrowed.”
The bailout’s failure has once again stoked fears of another great depression, fears that had largely been averted when it was first announced.
“If this package gets cobbled together and as a result credit markets sort of return to normal . . . then my guess is that we’re on track for a normal recovery,” said Ragan. “If we don’t get credit markets back to normal then we might be in for much worse times, and that’s exactly the argument for getting together this package because we want to avoid financial market meltdown which then leads to a real economic problem.”
