Reader Question: Would a Wall Street Bailout REALLY Help Main Street?

With the Senate trying to revive the Wall Street bailout bill, it is no surprise to me that I have been getting a few reader questions that are similar to this one:

We hear that a Wall Street bailout would help Main Street. Is this more of the "trickle down" speak from the Reagan era? Or is there some practical and observable truth to the claim?

It is true that we have been hearing from politicians trying to pass the bill and even from big business owners that what happens on Wall Street can influence the rest of us "regular" folks. And it that is more than how certain institutions are too entrenched in our economy to fail.

Here are three very real ways that Wall Street can affect Main Street:

1. Jobs. As capital and liquidity dry up, as companies' stock values drop and some fail, there will be job loss. Companies that can't raise money through selling increasingly valuable stock -- and who can't increase cash flow liquidity through credit -- instead turn to concentrating on preserving what money they do have. And that means that something has to be cut: jobs and/or benefits are usually the first things to go. Even companies that are not in the financial sector may be affected as the entire stock market falters.
2. Mortgage rates. Restricted credit and low liquidity mean higher rates. Additionally, tighter credit market conditions as a result of the troubles on Wall Street mean that lending standards are tightening. Between the higher mortgage rates and the tighter standards (which include down payment requirements of 20% to 30% in some cases), fewer people can afford homes. And that one that can afford homes are paying more for them.
3. Retirement savings. Most people have retirement savings accounts. These accounts are often in the form of IRAs and 401(k)s. These are investment vehicles. This means that when the stock market goes down, so does the value of your retirement savings. On the one hand, for those of us with long horizons, this isn't so bad. We can get more for our money and we'll be in a good place when the market recovers. The unfortunate part of this, though, is what happens if a company in your retirement savings account fails. It renders that investment almost completely worthless. Even takeovers like Wachovia and WaMu mean that shares in retirement plans become next to worthless.

What you are trying to do depends on how much Wall Street affects you. Since I work from home, have a long time for my retirement savings account to recover and since I bought a home before this mess blew up, none of these things affect me on a personal level.

But they may affect you and countless others. Does that mean Congress is on the right track? If something has to be done, is the current bailout proposal a good idea? Probably not. There are all sorts of other possibilities that aren't being considered.

In fact, members of Congress should take a step back and consider some alternatives that could help Wall Street and Main Street on a more practical (and possibly less expensive) level.


Tags: stock market, Wall Street bailout, retirement account, mortgage rates, economy, retirement savings, personal finances