Wall Street's Worst Week Ever

Posted by: Chris Palmeri on September 15, 2008

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Just another manic Monday? No quite. Lehman Brothers is bankrupt. Merrill Lynch is being swallowed by Bank of America. Bear Stearns is already dead. Other major financial institutions such as insurer AIG are teetering on the brink.
What does the tarnishing of these storied names mean for the rest of us? No doubt there are some people out there who are probably happy all of these overpaid financial wizards are finally getting their comeuppance. Like them or not though, Lehman, Bear Stearns and Merrill Lynch and other investment banks provided the capital so that millions of Americans could buy homes, cars and boats and just about anything with a credit card. That was the miracle of securitization.
Now that this credit spigot is running dry, what will it do to the national economy? Ed Leamer, a respected economist with UCLA’s Anderson School of Management, says the immediate impact of these big investment bank failures is not as powerful as one would think. The consumer has already cut way back in spending, taking as much as a full percentage point off of GDP growth. “That’s behind us,” Leamer says.

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Next will likely come a slow down in business spending. Since fewer people are buying cars and washing machines the companies that make them will continue cutting back. The fortunate think is that these two pillars of the economy, consumers and businesses, didn’t go south at the same time. “We’ve been in a zero growth economy for some time,” Leamer says.
The bad news is there is no new economic engine like the dotcom boom or housing on the horizon. But continued growth in population, healthcare and schools keeps the economic train rolling along.
There’s a psychological blow to hearing that such storied institutions have been hobbled. But a far greater impediment to consumer confidence has been soaring gasoline prices, Leamer figures. “They’re reminded of that every time they fill up the tank,” he says. And with oil down below $100 today, there is a least some bit of good economic news out there.

Reader Comments

Snoz

September 16, 2008 02:49 AM

In the beginning there were hungry California real estate agents, clever mortgage brokers, aggressive appraisers, and stealthy landowners who stole the land from the natives. The Devil said to them, "Go forth, multiply and be bountiful." In the Garden of Avarice, they conjugated with the Real Estate worshippers, Flippers, used car salesmen from Los Angeles who now call themselves real estate investor, and high minded New York investment "Analyst" the like of Lehman, BearnStearn, Merrillynch, and Citigroup. The Devil saw the fruits of their work as good and blessed them to go forth, multiply and be bountiful. And so they held counsel together with lust, greed and enthusiasm against Goodness. By the fifth day, their Devilish work was finished because California has devolved into worshipper of the golden calf forsaking the Honesty, Integrity, and Decency. The Honest-Hard-Work ethic succumbed to the prey of Flippers and "Investors" whose promise of easy money seduced the multitude. As the real estate speculation reach its mesmerizing frenzy, uncontrollable talk of gold and silver rolled off the tongue of every unabashed Californian. In time, the plague spread across the land. However, on the 6th Day, the day of reckoning arrived. The Almight issued judgment upon the evil California, the land Sodom and Gomorrah, by casting away their idolatry, striking dead their money changers, and smiting the unrighteous. And so it came to pass that just as the high are made low and the crooked are made straight, BearnStearn, Merrillynch, Lehman, CountryWide, Indymac, Carlygroup, Citigroup, AIG, CreditSuisse, UBS, and others were either toss into the judgment fire or severely punished. As the forces of correction approached, "Save me, Save me!" shouted the California Flippers and "Investors." "Get thee to thy nunnery," commanded the Almight as the cash registers fell to the earth, collaterized securities burned, and financial empires lay up in ruins. While the heavy sinners hid themselves or sought the fellowship of the Federal Reserve or claimed refuge in the Treasury Department, other unrepentant Flippers decided to wait-out the calamity holding steadfast that their golden calf will soon reveal itself to them. On the 7th Day, the Almight has promised that surely while the wages of sin is death, and disciples of the golden calf shall be casted into the fire, there are worse punishment for those who are unrepentant conspirators, accomplices, and assessories.

Courtney Johnson

September 17, 2008 12:11 AM

The real estate market was a mass market for hungry, get rich quick individuals. Just about anybody who had the legal right to work were able to work in the industry without much of a requirement. Everyone who participated in the real estate and mortgage spike also contributed to its downfall. Now, the economy and possibly the entire world will inevitably suffer, unless of course, some miracle happens and the crisis ends before the actual "market crash."

For daily updates on the housing market and credit news, visit http://MyLoanNegotiator.net.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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