As I mentioned in a post last night, the Wall Street financial crisis is THE major political issue facing the country right now. There are lots of complex responses to offer, involving a mix of regulation, de-regulation, streamlined regulation, bailouts, etc. I personally agree with Barack Obama’s charge that excessive de-regulation of the financial services sector over the last several years (going back to the Clinton Administration actually) is largely-responsible for this meltdown. But that doesn’t necessarily mean we need to, say, re-institute the Glass-Steagall Act. The 21st-century market requires 21st-century regulations. What are those?
What’s striking about today’s market behavior was the extent to which the Dow plunged AFTER the State of New York allowed American International Group (AIG) to borrow money from its subsidiaries. While this could have helped calm investors on Wall Street, it seems to have fed into the panic. After all, for much of the day, the market merely hovered around its 300-point drop and even hinted at a recovery. The story of the day could have been: “Wall Street shakes off Lehman woes, gains confidence from Bank of America purchase of Merrill Lynch and NY plan to help AIG.” But the last hour of trading told a different story.
Next up will be Washington Mutual. Do they survive the week? Are any other major financial institutions at risk of collapse?
More importantly, what does this mean for credit access? If the investment banks retrench, the sluggish economy will completely stall. What will give the great houses of Wall Street the confidence to invest again? And how soon will this ripple through the economy?
We’ll find out in the next few days.