What Happens on Wall Street Doesn’t Stay on Wall Street

March 18, 2008

We live in an increasingly interconnected world. Even the smallest and most seemingly inconsequential events can impact all of our lives, from protests in Tibet to the hijacking of an oil tanker in Iraq. And there’s one thing of which we can all be sure, what happens on Wall Street doesn’t stay on Wall Street.

The collapse of the 98-year-old investment bank, Bear Stearns is the latest and most pressing example, one that is being felt by not just those in investing in sub-prime real estate loans, but by automakers and auto buyers across the country.

When JPMorgan Chase purchased the failing Bear, on Monday, for $2 a share, a 93 percent discount from the firm’s Friday market close, it provided another body blow to the U.S. economy. It is all but certain to lead to another tightening of credit, which immediately makes it harder for potential car buyers to get a loan. And that, in this game of financial dominoes, means that we can expect to see a further decline in already slumping U.S. car sales. Take that a step further and the industry will require still more cuts in production, which means lost jobs, less consumer spending and a yet-weaker economy.

But it doesn’t end there. As the Federal Reserve Board rushes to shore up the assets of Bear Stearns, now a part of JPMorgan, it is also likely to trim interest rates. And that sends borrowers scrambling for other places to park their cash. For U.S. investors already scared by the stock market slump, that may mean buying gold. For big buck foreigners, that is leading to an exodus from the U.S. The Chinese, Japanese and Europeans who’ve propped up the American economy are going elsewhere in search of bigger returns. And as they flee, the American dollar is collapsing. And as the greenback plunges to recent record lows, it is driving up the price of oil, which surged ti nearly $112 a barrel, on Monday.

Soaring oil prices directly impact all of us, even those who don’t commute by car every morning. There is a potentially positive side: worried about fuel economy, many motorists are thinking about trading in on more efficient alternatives, something that could prop up the sale of new vehicles. That’s if they can get loans. But tight credit is driving many motorists out of the market. And soaring oil prices could very well foster a wave of inflation that would further weaken the economy.

It’s a potentially endless cycle that underscores the difficulty the financial community and its regulators face as they try to reign in what some are now calling the worst financial crisis since World War II.

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