Over the weekend, some people along the Gulf Coast and on Wall Street might have wondered if Chicken Little was right—the sky indeed was falling.
For those in the devastating path of Hurricane Ike, it probably seemed like that was the case as water and wind ripped apart communities and caused several deaths, the extent of which we are not even yet fully aware. Likewise, for those directly impacted, the bankruptcy of the 158-year-old Lehman Brothers Holdings, Inc., may have exacerbated widening fears regarding the nation’s overall fiscal soundness.
Reactions to both traumatic events were swift, since similar incidents have happened in the past. However, this time there were some differences. Rescue was the name of the game along the Gulf Coast, but rescue, at least at taxpayers’ expense, was virtually nonexistent for the giant investment bank.
While the Chapter 11 filing of Lehman Brothers does not affect any of the broker-dealer subsidiaries, the sale of Merrill Lynch & Co., Inc., to Bank of America and the subsequent federal package for American International Group, Inc., are keeping worry about the financial future of the nation high on the radar of concern.
For victims of Hurricane Ike, uncertainties about the timetable for returning home and the conditions they will face when they arrive are causing severe apprehension and uneasiness. Fortunately, the problems experienced in providing assistance following Hurricanes Rita and Katrina have not been as severe because of better (though still not perfect) coordination and communication between government officials and volunteer groups.
To abate the mounting anxiety caused by the collapse of Lehman Brothers, the Federal Reserve is attempting to supply more cash to the financial system. To keep bank borrowing costs low, the Fed added some $70 billion to the reserves available to US banks and also widened its lending window by expanding the collateral it accepts for loans to securities.
Additionally, the Federal Deposit Insurance Corporation continues to monitor the situation and plans to step forward if necessary to mitigate any impact the recent actions might have on insured banks. However, more than 98% of the banking industry is well capitalized and expected to have the ability to weather the current storm. This strength is particularly noteworthy among Texas banks.
The dramatic drop in the stock market on Monday of this week, the steepest one-day fall since the terrorist attacks in September 2001, fueled speculation that the credit-market losses might worsen the economic slowdown. Prices at the pump jumped quickly (17 cents per gallon in the first three days, reflecting the fastest pace in three years) due to the brief standstill in supply. Fortunately, damage to refineries was not as severe as earlier projected. Still, it will take some time before the energy situation eases back to the more recent state of normalcy.
Oil prices closed below $100 per barrel on Monday for the first time since early March, as damage reports were less extensive than feared. Barring another threat to supply, oil prices are expected to remain lower as slowing economies constrict demand. Gasoline prices will likely soon follow.
Assurances regarding the overall soundness of the nation’s financial situation and commitments to action by the President, Treasury Secretary, FDIC, and others have caused the market to respond positively in attempts to make up a partial recovery. Likewise, as people begin to repair and rebuild along the Gulf Coast and as business operations that were affected gradually return to pre-Ike conditions, confidence in America’s ability to respond to emergencies, physical and fiscal, will undoubtedly be strengthened.