Credit crisis has Main Street watching Wall Street

The financial credit crisis could affect US consumers.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the August 13, 2007 edition

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The current upheaval in financial markets is hitting some highly specialized lenders and investors the hardest, but it hasn't stopped there: It has big implications for the whole economy.

The stock market has become much more volatile in the past few weeks. Borrowing has become tougher for home buyers and some businesses.

These effects come as ordinary Americans have greater financial wealth but also more debt than ever before. It also coincides with financial industries becoming increasingly complicated and global in scope.

Behind all this lies a big question: If the turmoil on Wall Street gets worse, how large an effect will it have on Main Street – in communities where consumers are already burdened by high gas prices and falling home values?

It is that concern – not a desire to bail out tottering mortgage firms – that prompted the Federal Reserve to step in last week as a provider of cash and confidence. That helped the Dow index post a small gain for a roller-coaster week. "We have a financial sector which is in many ways different than it used to be," says Saul Hymans, a University of Michigan economist in Ann Arbor. "It's not a matter of whether it's going to ripple into the rest of the economy, but the degree."

Most forecasters say a recession is not on the immediate horizon, especially now that the Fed has sent a "We're here to help" signal to stressed markets. But the consensus view is for a 26 percent chance of recession in the next 12 months, says the August release of the widely watched Blue Chip Economic Indicators survey. That's up from 23 percent in July.

A summary of economists' opinions added: "Should credit markets remain stressed, further weakness on Wall Street could migrate to Main Street, resulting in a softer economy than now anticipated."

Financial conditions have always been intertwined with the production of goods and services in the broader economy. When one side lands in some trouble, the other feels it, too.

The financial sector is on much sounder footing now than it was in the 1930s, when the lack of federal deposit insurance prompted a wave of bank failures as customers rushed to pull their money out. But dramatic changes over the past 20 years created new uncertainties as well as resilience:

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