Fiasco hasn't hit most - yet

The Baltimore Sun

It certainly doesn't feel this way to people who have lost their homes or jobs, but so far the historic economic trauma on Wall Street has left Main Street relatively unscathed.

Whether the two boulevards soon collide will give a good idea about how much trouble the country is really in.

Let's hope this is a 1987-style Wall Street collapse, which largely spared the economy as a whole. Root against the 1931 or 1974 varieties, which presaged years of high unemployment and consumer misery.

Soaring foreclosures, falling markets, plunging home prices and national employment reductions bode ill for ordinary Americans, but so far they're nothing compared with what's going on in finance.

"We will not see this again in our lifetimes," a stock analyst told me on Oct. 19, 1987, the day the Dow Jones industrial average fell 23 percent.

You could say the same thing about this summer.

With the bankruptcy filing of Lehman Brothers and the shocking sale of Merrill Lynch to Bank of America, there are only two independent investment banks left on Wall Street. Many expect Goldman Sachs and Morgan Stanley will soon follow Merrill into the arms of commercial bank saviors.

AIG, the biggest global insurance company and far larger than either Lehman or Merrill, trembled on the edge of credit downgrades yesterday as it sought relief from regulators.

A week ago the government seized mortgage giants Fannie Mae and Freddie Mac in an unprecedented expansion of its powers, taking on $5 trillion in liabilities.

Wall Street has now lost something like a half-trillion dollars on bad mortgages.

Many believe the damage will ultimately pass a trillion - and that's just on the debt side of the ledger. Counting yesterday's stock market swoon, shareholders of the big corporations in the Standard & Poor's 500 index have lost $3 trillion and change in equity.

But so far, the American worker and the American consumer haven't been beat up as badly.

True, official unemployment rose to 6.1 percent in August. But that's nothing like the 10 percent the nation saw in the early 1980s, even if you believe economists who say the government understates today's unemployment by a percentage point or two.

True, the economy has shed jobs every month this year for a total loss of 605,000 positions. But from 2001 to 2003 the country lost almost 3 million jobs, and the economy was smaller then.

Consumer spending is flagging for the first time since the early 1990s. Adjusted for inflation, retail sales fell in August and July. Again, however, the declines are less than those of previous downturns.

What happens next will be critical.

Consumers are somewhat insulated from Wall Street's immolation. Most don't own stock in Lehman or Fannie or AIG, although larger stock market declines this year have hurt retirement accounts. But if scary headlines, rising joblessness, expensive energy and continuing declines in home prices send consumers into a further funk, the downturn will be much more severe than many believe.

For years rising housing prices financed an American spending spree that appears to be coming to an end. If spending only treads water and doesn't plunge, the economy may still escape the kind of recession last seen in the early 1980s.

Lenders will be critical. Now that credit has dried up on Wall Street, Washington must not only supply cheap money to traditional banks but also persuade them to lend it to creditworthy customers.

Speaking of Washington, that's where the long-term risk to the U.S. economy lies.

The Federal Reserve and Treasury are taking on huge new liabilities to bail out investment banks, and they're taking on an equal load to rescue consumers. (People are already talking about another fiscal stimulus - financed again with money borrowed from China, Japan and other creditors.)

One day this country's mounting debt will cause a collapse of the dollar, sky-high interest rates and maybe even bond default by the U.S. government (which won't get bailed out by anybody).

But the consumer is the immediate risk. If addressing the short-term consumer problem means worsening the long-term threat to national solvency, so be it. Because if consumers stumble, Wall Street's problems will become even worse.

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