Damned if they do and damned if they don’t. Either way Congress is going to take the rap for whatever happens from America’s worst financial crisis since the Great Depression. In acquiescing to a sceptical Main Street, Congress voted thumbs down on the Wall Street bail-out package, leaving the country’s, if not the world’s financial system exposed to further price declines in the US housing market.
Congress’ rejection of the package reflects the still huge and growing chasm between Wall Street and Main Street. Notwithstanding the growing list of banking casualties in the US, and ballooning credit spreads (see pages 8-9), particularly for financial institutions themselves, Wall Street’s crisis is yet to make a big splash on Main Street.
To be sure, floating-rate mortgages in the United States are up almost a full percentage point, and car loans are getting harder to come by. Leases for fuel pigs like SUVs are virtually unobtainable, although that may be a good thing in a world of triple-digit oil prices. And while the American economy may be on the threshold of recession, payroll and industrial production losses to date, suggest that has so far been a relatively modest one.
But it is the very benign nature of today’s downturn on Main Street that could pose the greatest danger tomorrow. Without a material worsening in the unemployment rate or GDP growth, Main Street could well remain unimpressed with Wall Street’s balance sheet ills. And it could still take a quarter or two before average Americans feel the full impact of what is happening to their financial institutions. Until they do, they are unlikely to become any more tolerant of a bailout package.
The only problem is that the financial system may not be able to tread water long enough before Main Street suffers sufficiently to get on board with a package. That’s why it is so pivotal that a package come now, before systemic damage is sustained.
Watching from the sidelines, Canada, and indeed the rest of the world is not immune to what Congress ultimately decides. The international community benefits from any potential package without having to foot the bill for its mammoth cost.
While neither the Canadian economy nor the Canadian housing market (see pages 10-11) are as exposed to the US financial crisis as their American counterparts, ironically the TSX seems far more leveraged to the crisis than either the Dow or the S&P 500. Fears of a financial market meltdown do not bode well for investor sentiment towards commodities. The recent wild ride in oil prices underscores how concern over toxic balance sheets on Wall Street can spill over into other markets, even where there is little to fundamentally connect them. Auto sales and oil demand are still booming in BRIC countries, where SUV sales lead double-digit vehicle sales growth (see pages 4-7).
For once, a much weaker economy may be needed, if only to put Main Street and Wall Street on the same page.
