main street blues

Wall Street's crisis may be contained--for now, but main street's problems are only just beginning. Thousands of layoffs from financial institutions are likely to hit main street pretty hard. Here is a group of well-to-do individuals who tend to splurge on housing and cars, that will suddenly find itself out of work. Since a fair number have already splurged in a rather excessive manner, expect another round of foreclosures to hit the market pretty soon.

Going forward, the reduced spending will ripple through the economy. It is the famous trickle-down effect, Republicans are so keen on. Only this time it works as a gusher, and in reverse too!

Job losses, high food prices, high gas prices, and a credit crunch will all add up to a perfect storm. Not to mention all the tax increases we are likely to see to pay for all the bail-outs in the financial industry.

The main street effects of this crisis will not be felt for another four to six months. Furthermore, it is by no means certain that the financial crisis is over. I would give it at best a 5-10% chance. I am not even sure it is fully contained yet, let alone solved.

I am starting to think that a bank-run a la 1930 is no longer a far fetched scenario. Washington Mutual (WaMu pour les intimes) experienced a mini bank-run of sorts yesterday, despite the FDIC insurance. The trouble with such herd-like panic behavior is that it can cause even a well-run and well-capitalized institution to go under (I am not sure if WaMu is or not, but that is another matter). If all depositors claimed their deposits banks would effectively have to shut their doors.

I assume there are many analogous situations out there. Situations where a sudden panic could lead to the demise of otherwise sound businesses.

Cash flow is what matters here as many California businesses are starting to realize. Having no state budget for months can do you in, even if you run a sound enterprise that isn't leveraged the way Lehman Brothers was.