I am no economist, but luckily other people are and can better explain things than I can. I have gotten several emails this week asking about how this market slide, the Bear Sterns mess, and the decline of the U.S. dollar could affect individual people who are NOT in the banking industry, and while I did my best to try to answer the emails, I found this article in USA Today that does a much better job. Here is a quick rundown of the questions and answers in the article, and you can read the whole thing for free online at the site.
What is an investment bank, and why should I care what happens to one?
If investment banks can’t function, the financial system could grind to a halt. Companies and municipalities would have a hard time raising money. Businesses would be unable to expand and create jobs.
Does the collapse of Bear Stearns mean other investment banks are in danger?
Although most investment banks are public companies, it’s hard to tell precisely what assets they have on their books and what condition those assets might be in. Less scrutiny is required of investment banks and hedge funds.
Is that why is everyone so worried?
The collapse of an enormous financial institution stirs uncertainty, and uncertainty rattles Wall Street. Lenders are happiest when they are confident they will be repaid. If they think there’s a chance that borrowers will default, they simply don’t make loans. Their refusal, in turn, can shut down the economy and the financial system.
How is this going to affect me?
The value of the U.S. dollar will continue to sag, thanks to lower interest rates. As interest rates here fall, global investors sell their dollar holdings to find investments with higher returns. That pushes the dollar’s value lower “” meaning Americans face higher prices.
So it will cost more for everyday goods and for travel to Europe. How else does the falling dollar affect me?
The nation needs foreign cash to finance its gaping trade deficits. With private investors vanishing, that’s left Uncle Sam increasingly reliant on foreign central bankers. Nations that are putting a big chunk of their reserves into U.S. securities, including China, are earning puny returns. And as the United States slashes interest rates to stimulate its economy, fast-growing countries in the Persian Gulf are forced to do the same. That is sending their already high inflation rates even higher.
So how serious is the financial crisis? Is there any risk of a full-blown depression (a severe downturn that lasts years)?
Hard to say. But it’s no longer just hard-core gloom-and-doomers who are predicting dire outcomes. “It’s going to go from bad to worse. “¦ This is certainly the worst financial crisis in the last 50 or 60 years,” says Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard.
So there you have it…it’s not just the survivalists calling this as they imagine it, but rather regular old bankers and economists are predicting a bad outcome as well. Check out the entire article over at USA Today to read more…if you dare.