Washington
18 September 2008
Several leading economic experts say the turmoil on Wall Street is caused by a crisis of confidence and that it is likely to have a significant impact on the overall economy and ordinary people across the world. VOA Correspondent Cindy Saine reports from Washington.
The financial crisis has seen some of the most venerable names on Wall Street fail or be swallowed up by other firms. Other companies appear to be under siege, causing some analysts to worry that the turmoil might spread to commercial banks and ripple out to other segments of the economy.
Robert Reich, who served as Secretary of Labor during the Clinton administration and teaches at the University of California at Berkley, says there is cause for concern.
"The worry is that credit markets become so tight as a result of all of this, that lending all but stops," said Robert Reich. "Small businesses cannot get the loans they need to invest in new factories and equipment or research. Individuals can't get the loans they need to buy automobiles or to finance houses or a housing purchase and the economy basically goes into a very deep recession. Now, the implications of that, of course, percolate and resonate around the world. Global capital markets are already having a very, very difficult time."
John Irons is Research and Policy Director of the Economic Policy Institute, based in Washington. He has a similar view of the crisis.
"Well, I think it is a little bit early to figure out exactly what the impact will be," said John Irons. "But there certainly are risks that the instability on Wall Street will filter its way down to the lending markets for consumer loans, for car loans, mortgages, and for commercial loans through business, which could have a very serious, detrimental impact on the broader macro-economy."
Some commentators have compared the current upheaval to the Great Depression which began in 1929.
But economist Robert Reich is among those who think it is very unlikely that people will line up outside their neighborhood banks to withdraw their money in a panic.
"I don't think we are going to see a run on commercial banks because commercial bank deposits are insured by the Federal Deposit Insurance Corporation," he said. "So we are not going to a situation such as we had in the early 1930s when individual depositors in commercial banks all tried to get their money out, and well, put it under their pillows. That is not going to happen."
Most experts seem to agree that, so far, the impact of the financial market crisis in the United States can be seen in a decreased willingness of people to invest or lend money, and higher unemployment numbers. The crisis in the housing market has also led to a significant decline in the value of many Americans' primary investment - their homes.
Robert Reich says the average U.S. consumer is not likely to be in a spending mood.
"I mean they will certainly buy necessities," said Reich. "But any discretionary items are probably going to be put on the shelf; they are not going to buy them for now. And that means the demand side of the economy, the purchasing side of the economy, is going to be in tough shape."
Reich advocates better regulation of Wall Street and more transparency in capital markets to restore investor confidence and get the U.S. and global economies back on solid footing.