All eyes are on Wall Street as bankruptcies and bailouts continue to be announced into the end of the week.
Although New York's Financial District has seen more collapses and buyouts this week than in recent history, Isaac Ehrlich, chairman of the Department of Economics and SUNY Distinguished Professor, does not believe this means danger for the "real economy."
"It's a financial crisis. The jury is still out on impact on the real economy," Ehrlich said. "Financial sector is just one sector of the economy. It has no general output impact on the economy. It has to affect many other sectors."
The week of bad financial news began on Sunday with the recovery of leading wealth management company Merrill Lync, from bankruptcy by Bank of America for $50.3 billion in stock, according to the New York Times.
Lehman Brothers, Inc. followed suit, escaping the demise of bankruptcy with an acquisition by Barclays Capital, a major financial services provider extensively established in Europe. Lehman Brothers listed an expected third quarter earnings this year at an estimated net loss of $3.9 billion or $5.92 per share.
On Tuesday, the Federal Reserve bailed out American International Group, Inc. (AIG) providing them with $85 billion to keep the world insurance leader out of bankruptcy.
AIG, with over $1 trillion in assets and substantial equity, hopes this loan will give the company enough time to resolve its liquidity issues, according to a statement released by AIG.
New York Gov. David Paterson lobbied to provide AIG with a loan, because of the correlation between Wall Street's wealth and the state's well being, Ehrlich explained.
How did this crisis on Wall Street unfurl?
Wall Street is a lifeline to the state. The companies in the Financial District of NY provide the state with one-fifth of its economic resources, according to Ehrlich. However, Wall Street has a much more significant affect on New York than it does on the nation as a whole.
"Wall Street is a financial mediator in the end. It facilitates financial connections in companies in the U.S.," Ehrlich said. "The role is very important because it helps companies execute buying and production growth, so the influence is very important and real."
Recent financial troubles may be traced back to the investment banks that are tied to the housing market, which has greatly depreciated recently. The corporation giants on Wall Street undertook too much debt, using real estate as collateral, Ehrlich said.
"They are finding out that they are not in a position to pay for that debt," Ehrlich said. "Because if we have a problem in the housing market. Housing values have been decreased - financial banks' collateral are not worth as much."
Effects of the financial crisis on the university
The faltering financial sector currently does not equate to a negative diagnosis for the nation's economy.
"The problems are more financial problems; they have not yet affected the general economy," Ehrlich said. "The general economy is still moving along. We are definitely in the midst of a slow down, technically, not in a recession yet."
However, the financial crisis downtown will most definitely affect how things are run up here in Buffalo.
"Unfortunately, it does have an effect on the UB enterprise because the Governor of the state of New York is urging legislators to approve reductions in state," Ehrlich said.
One-fifth of the total states' tax revenues is generated by Wall Street corporations.
"The failure of a lot of company generates greater repercussions in New York. It's a bit more concerning," he said.
UB will feel the budget cuts directly being a state-funded university.
"Reduction of 10 percent in the budget of SUNY will have an impact on UB because a good proportion of UB's budget is state subsidized," he said.
The impact on students is not immediate because every effort is made to ensure students and faculty are least affected by the budget deficient, Ehrlich said.
U.S. repercussions, currently, unlikely
The financial sector is doing poorly; however, other sectors of the economy are doing well, Ehrlich explained. The current economic condition has not reached the point of it being characteristic of the last recession.
"We have not sunk into recession yet, not saying we won't," Ehrlich said.
The financial sector and the health of the general economy are on two different paths. Though the two may affect each other in the future, they have not done so yet.
"The bottom line is our general economy is still generally healthy - we're in a slowdown," Ehrlich said. "Financial markets are probably going to be unstable. In the long term, we should be optimistic. We are a vibrant economy and we'll come out of it, no question about that."
Photo: Courtesy of Laron Fomby
