Politics and Governance

Main Street Blues

Politicians and others in recent weeks have been liberal in invoking the image of a suffering main street when considering the so-called Wall Street bailout plan and its potential effects on the average American. Senators John McCain and Barack Obama each used variations of the term twice during Friday’s debate, and traditional media and bloggers have adopted the imagery with equal zeal. In fact, though the idea may be fast approaching cliché status, main street’s pain does deserve more than just lip service.

The effects of financial turmoil are already beginning to be felt on main street, or at least outside of the financial services industry, and the early effects close to home are almost scary enough to warrant the cliché. According to a Sept. 27 piece in the Austin-American Statesman, Central Texas public agencies are experiencing trickle-down effects. Some agencies have been hit with higher interest rates on variable rate bonds and short-term debt called commercial paper.

Last week’s volatility in financial markets forced investors to pull their investments out, resulting in higher interest rates. Rising interest rates for commercial paper cost the City of Austin about $85,000 in interest just in the last week or so. Treasurer Art Alfaro told the Statesman that Austin Energy and the Austin Water Utility will switch to paying for capital projects with cash, rather than short-term debt, until investors return to the market.

At the state level, sustained high interest rates would cost the Texas Department of Transportation more than $22 million over the course of a year. Just as troubling, student loan lending has already taken a hit according to Tom Melecki, director of the University of Texas financial aid office. Since last spring, the number of companies that loaned money to students has dropped by 20 to 30.

Constraints on local government budgets, fewer lenders for student loans and a general decrease in the availability of credit are the very real consequences of reckless decisions made by subprime lenders and some U.S. securities firms. The grim reality for virtually all Americans is that the costs of a bailout will be very real and long lasting.

In one of the most unfortunate paradoxes of this new century, the vast majority of Americans had no direct involvement in causing this economic downturn; they will, however, be paying for it indirectly and directly for years. Yet the cost of doing nothing has a greater price—for local governments, for students and for individuals looking to own a home or buy a car.

The choice of whether or not to approve hundreds of billions of dollars for a bailout really is not a choice. Or rather, it is a choice in the same way that the decision to pay ransom for a beloved family member is a choice.

Some examples of how things will change are already evident. U.S. securities firms will never be the same, and neither will mortgage lending. New and substantial federal oversight is a near certainty. How local governments and regular citizens will adjust is less clear.

For cities, cutting capital projects until more favorable lending terms are available will be necessary, even if that means putting off projects currently on bond-issue wish lists and taking a critical look at programs that could be cut to save money.

More importantly, consumers must break from predatory lending, especially high-interest credit cards and low down-payment loans. If unscrupulous financial services executives who crossed their fingers and made shady deals caused today’s economic powder keg, self-entitled consumers with big dreams but little sense of responsibility sparked the disaster.

What is important is that credit is still available at a reasonable price for those who need it: for consumers with necessary and well thought out major purchases, for cities with emergency projects requiring short-term debt, and for students requiring loans for school. After all, the same blameless people of main street will be paying for the economic fix anyway.

David Kassabian

David Kassabian is a first-year student at the LBJ School and a former newspaper journalist. Before enrolling in the LBJ School, he covered local government in Corpus Christi, Texas.


Leave a Reply

Your email address will not be published. Required fields are marked *

Social Widgets powered by