Financial Crisis and the Real Economy

One of the biggest questions about the financial crisis – one heard from Capitol Hill to radio talk shows to casual conversations with friends – is why it matters for ordinary people. One major reason a significant proportion of public opinion is against the rescue plan is the general failure to make the connection between panics in the financial sector and the ordinary lives of everyday people; simply saying that the plan is necessary to prevent (or moderate) a recession smacks too much of “trust me” to be credible.

The connection is that much of the ordinary activity in the real economy relies on credit – think no further than the volume of purchases made using credit cards. (Although banks have been reducing credit limits, there is little risk for now that credit cards will stop working overnight.) And in today’s conditions, when many financial institutions are potential victims of liquidity runs, lending has virtually ground to a halt. The New York Times has an article today about the impact that the current crisis is having on local governments suddenly unable to raise money for ongoing projects such as highway repairs and hospital expansions. Across the country, local governments issued $13 billion in fixed-rate bonds in the first half of September – and $2 billion in the second half. A sudden 87% drop in a major source of municipal funding is a very real impact of the financial crisis, and one that will necessarily result in both fewer services and fewer jobs for taxpayers.

One response to “Financial Crisis and the Real Economy

  1. I totally understand all the possible ramfications
    of not stopping a recession or depression and do not
    need anyone else to explain the fallout.
    The bottomline is I am willing to lose some of my savings, pay higher price for food and services,
    and even work past my planned retirement age as long as it keeps our governement out of the free enterprise system since THEY are the ones that told
    the banks to go give risky loans to people who could not afford them. Of course lockup the companies that defrauded their customers but laws and tracking are already in place to do this… we just didnt execut.