If the economy has started to trouble you, especially after its rough weekend of more foundering bank announcements and an equally turbulent start on Monday, you’re not alone. The news has been abounding with stories, and you can read about much of the happenings in our own paper this week. The economy is clearly in a shaky place, and it’s getting to the point where we all need to be concerned.
Though the government seems to swoop in at the last minute to bail out one bank or ease up on borrowing restrictions so another company can save itself, I fear the time where there won’t be much we can do is on the fast approach. Even this past weekend, we have seen limited action on the government’s part to save Lehman Brothers before it announced it was filing for Chapter 11 bankruptcy. Whether this was done to reassure the public that government action isn’t needed or that the economy will recover with less intervention than we think, we may never know.
But Tuesday, just days after making that decision, the government realized it couldn’t let the same thing happen to American International Group and lent it $85 billion for a controlling 80 percent stake in the company. Letting this firm crumble would have most certainly sent the stock market into turmoil unseen since the ’80s, when the stock markets around the world crashed in October 1987. AIG has roots in every imaginable aspect of the financial arena, from life insurance to airplane leasing, to retirement planning, to underwriting. The collapse of this company would have stifled businesses of all kinds.
This crucial save is only a bandage on a much greater problem, though. While it seems like we are safe for now, until massive overhauls are made, we won’t see improvements for a long while.
When Fannie Mae and Freddie Mac were taken over by the government and put into a conservatorship this kept the mortgage lending industry from grinding to a halt, which is mostly what those companies deal with. Despite this, people who have mortgages with high rates may still find it hard to obtain lower ones, and anyone looking to buy a house with less than exceptional credit may not be in a position to qualify for a loan. And, as the housing market continues to depress, prices are falling, making interested house buyers wary of buying now.
The crisis will continue to claim staples in the financial industry. Washington Mutual, the U.S.’s largest savings and loan institution, may even be next and find itself in the same position as Lehman Brothers. As mortgage and credit card debts continue to pile up unpaid to many lenders, which is partly the case for Washington Mutual, it may be hard for the bank to survive. It will have to count on government support or look for a buyer to take it over soon.
Despite all of the good the government has done for the economy in the short run, though, the only players who can really fix the problem are the ones at the center of it: the banks themselves. Banks need to act quickly and truly work together to ensure a future with some stability. The government had urged stronger banks like JP Morgan Chase and Goldman Sachs to raise capital for other banks including AIG, but they were unable to help because the markets are in incredible turmoil. Banks will need each other now more than ever.
Although the government can with great ease take control of a firm and bail it out with tax dollars—as we have seen it do—there are less harsh lessons learned by the banks in this situation. In light of these hard times, the government has been seen as more lax on bank regulations but banks have allowed this to let them slip into what is now causing a catastrophic mess. It’s time for banks to start reflecting on their pasts and seeing how they can impact their own future.
