BUFFALO’S BUSINESS
Buffalo Business: The party is coming to an end
The era of easy credit is over. The age of paying back what you borrow is beginning. Deregulation is on the outs. A new age of regulation on the way in.
The laissez-faire approach to markets is history. The federal government is moving into the financial markets in an unprecedented manner.
That, in a nutshell, is the fallout from last week’s unprecedented turmoil on Wall Street. In seven days, a major investment bank — Lehman Brothers — went bankrupt; a stalwart brokerage firm — Merrill Lynch — was forced into a sale; an insurance giant — American International Group — got a massive bailout; and a major money market fund — Reserve Management’s Primary Fund — hit investors with a loss for just the second time in 14 years.
“This is going to have profound ramifications. You’re going to remember this week. History is being made,” says Anthony J. Ogorek, who runs Ogorek Wealth Management, an Amherst money management firm.
“This is the worst environment since the Great Depression,” says William A. O’Loughlin, who runs O’Loughlin Financial Group & Securities America, an investment firm in Amherst. “This is the greatest hammering and the greatest disaster ever to befall the broad base of Americans, because more people own homes than stocks.”
The worst pain from the financial crisis had been centered on the homeowners who had borrowed more than they could afford, mostly in the nation’s hottest housing markets.
But those bad loans now are taking down many of the financial institutions that had the bad judgment to make them in their rush to make money. And the impact is spreading to places like the Buffalo Niagara region, which never saw any of the gains from the housing boom.
It’s going to be harder to get a mortgage, especially if your credit is less than pristine. Same with buying a car. It’s going to be harder to get a credit card, and lenders already are cutting back credit lines and raising rates on existing customers.
All of this cheap credit helped drive the economy, pumping up home prices, fueling car sales and demand for all sorts of other goods consumers could buy with plastic. Now, the party is coming to an abrupt end.
That likely will mean consumers will start spending less, which would lead to more job losses and an even weaker economy, says Joelle J. Leclaire, a Buffalo State College economics professor. “I don’t see it getting much better very soon,” she says.
Last week’s bailouts and the Bush administration’s willingness to commit hundreds of billions more to buy up bad debt were government intervention on an unprecedented scale. Ideology aside, the administration feared that letting big Wall Street institutions fail could devastate the economy and prove more costly than rescuing them.
“The titans of capitalism have turned into socialists,” Ogorek says.
The crisis also is a blow to the free market approach that has prevailed across the country since the Reagan administration. It largely will be up to the next president and the next Congress to revamp the nation’s system of financial oversight, which failed so dismally to stave off this crisis.
Republican presidential candidate John McCain renewed his call Friday for tighter regulation of financial markets, saying regulators have been “egregiously lax” in protecting the American public. Democratic presidential nominee Barack Obama, while backing the Treasury Department’s plan to deal with the credit crisis, said: “This plan must be temporary and coupled with tough new oversight and regulation in our financial institutions.”
