UPDATE: A revised version of the Bailout bill was passed by the Senate on Wednesday evening and by the House Friday afternoon. President Bush signed the bill into law almost as soon as it was passed.
It’s been an extraordinary few weeks. The current financial crisis has toppled Bear Stearns, Merril Lynch, Lehman Brothers, Washington Mutual, and Wachovia. Prompted by the sudden collapse of insurance giant AIG, a $700 billion Wall Street “bailout” bill was introduced by Congress last week. The bill failed to pass in its first version, but as of today members of the Senate are working on negotiations and hope to vote perhaps as early as this evening on a modified bill. Now, while the politicians play the blame game and the markets fluctuate wildly, we are left wondering: What exactly does all of this mean for our everyday life and future? Latina.com got some perspective from financial expert Marissa Rodriguez*, an investment executive on Wall Street, to breakdown some of our biggest concerns.
What is the Bailout Bill?
For starters, the bill that failed to pass wasn’t exactly a “bailout” of Wall Street, Rodriguez points out. The official title of the bill was the Troubled Asset Relief Program (TARP) and the idea behind it is that the government buy distressed assets (loans, mortgages, and financial assets that aren’t performing and have become untradeable) from troubled financial institutions. "In theory, this gives companies cash to replace toxic debts, restore capital, and reestablish the trust that allows banks to borrow and lend at reasonable terms which would eventually trickle down to us, the consumer," Rodriguez says. Those in favor of the government intervention fear that without it, the economy will hit rock bottom. Nobody is sure of how vast the repercussions of this slump could be. On the flip side, although the bill did not call for a raise in taxes, many are concerned about the use of tax payer money to buy the distressed assets. The bailout would have had undeniably huge impacts on federal spending, federal debt levels, and our already enormous deficit.
Will I be able to get a new loan or a credit card?
One of the motivations behind these drastic measure being taken by the government is that many economists fear a credit crunch. Rodriguez notes, "Although credit will not be completely frozen, there will be stricter limits to the amount banks can afford to lend for credit cards, student loans, and mortgages." Therefore, the standards of how and to whom a bank will lend money to will become tougher and less people will qualify to borrow.
Because obtaining a loan will be more difficult, Rodriguez suggests that you explore alternative methods. "To save for college, you can consider opening a 529 plan which allows you to save at the current tuition inflation rate or the rate of the market," she says. If you want to buy a house, Rodriguez suggests you contribute as much money as possible to your 401(k) since the IRS allows you to borrow against that money for the purchase of a home without a tax penalty.
Will it be harder to find a job?
Rodriguez does admit that the job market is a major concern. The day before the Congress vote, secretary of the treasury Henry Paulson stated that “if Congress fails to act right now, a lot of people will lose their job.” Job cuts have been on the increase since September of 2007, Rodriguez notes, and the number of people who have lost their jobs in the finance industry is huge. "In today’s market, we can expect a general slowing of the economy and a continuation of the upward trend in unemployment rates" says Rodriguez. Now more than ever, it is important to save up a financial safety net and have it ready for a worst-case scenario.
What about my retirement plans?
As for retirement savings, if you have your money invested in a 401(k) or IRA, experts advise to keep it there. Rodriguez suggests, "If you are not currently retiring, it is a good idea to leave the money invested and let it ride the wave of the economy." She points out that because retirement plans are invested over a long period of time, it is unlikely that you will end up with less than if your money was sitting in a low interest earning savings account, even with a period of economic downturn. You’d also have to pay income tax and a 10% fee if you were to withdraw the money early. "Just make sure that you have a good account manager that keeps you aware of where your money is invested" warns Rodriguez.
Are you concerned about Congress passing the “bailout” plan this week? Are you opposed to or in favor of government intervention? Have you felt the effects of this financial crisis?
*name has been changed to protect confidentiality