Federal officials have intervened to stabilize financial markets, a move that could affect all of us as taxpayers and any of us applying for a loan.
Federal officials have taken over Fannie Mae and Freddie Mac and have purchased 80% of AIG with an $85 billion loan guarantee, while allowing Lehman Brothers to go belly up. Meanwhile, Bank of America has bought Merrill Lynch for $50 billion. Wall Street continues to roil under a housing market collapse in some parts of the country.
Economics professor Steve Fazzari with Washington University in St. Louis says the federal government decided that if AIG failed, it would be disastrous. Fazzari says that we have already seen some big losses on Wall Street.
"It would have been much, much worse had the government had not stepped in with this action," says Fazzari who adds that the downside would have been quite severe.
No one knows how much the moves might end up costing taxpayers. If Fannie Mae, Freddie Mac and AIG bounce back, the federal government could recoup its cost and not have to pay for its guarantees; if they bounce back.
St. Louis Federal Reserve economist Howard Wall says the one thing we do know, is that credit has tightened considerably.
"It’s not just those people who shouldn’t have gotten loans in the past, tightening that up." says Wall, "It’s everybody else (that) the standards are higher."
Wall says lenders now are skittish and are reacting to overdoing it in the past, when they lent money to people who weren’t credit worthy. He says the real problem is that Missourians will have to pay for housing problems in other parts of the country.