Don Williams doesn't know it, but he may be helping to bail out Wall Street.
Williams, a 64-year-old retired firefighter, lives off a pension and a handful of stock and bond mutual funds. "If the financial markets were to collapse," he said at home in Genoa, Nev., "I have so much tied into it that it would have a strong effect on my standard of living."
Millions of Americans feel it when the market swoons, and the Federal Reserve no doubt had them in mind when it slashed a key short-term interest rate Friday. Despite that supportive move, shareholder angst is sure to be a factor in today's trading.
To some observers, the Fed's unusual action was a sop to the investment bankers, securities traders and hedge fund managers who fanned the sub-prime mortgage boom and other excesses of the easy-money era.
They -- and to a certain extent the homeowners who tapped into the frenzy to spend beyond their means -- are taking the blame for the market mess and, in the eyes of some, should take the hit.
"They have to pay a price for the risks they have taken," said Stanley Nabi, chief strategist at New York-based Silvercrest Asset Management. "They're paying it now."
But because of Williams and other innocent bystanders across the country, the financial industry may be shielded from more severe fallout than what it is grappling with now. Whatever pain Wall Street feels inevitably spreads to Main Street, and regulators and policymakers want to prevent that.
In fact, the lowering of the discount rate, which banks pay to borrow money from the central bank, raised expectations that the Fed soon could cut its primary interest rate, the so-called Fed funds rate. Wall Street has pined for such a move as a way to lubricate the economy -- potentially a boon for masses of Americans, big investors and small -- and alleviate the credit crunch that has stricken the fixed-income market.
But is it the right thing to do? There's a running debate about the wisdom of the central bank's giving Wall Street the financial equivalent of a get-out-of-jail-free card, allowing the industry to curtail losses from its risky bets on sub-prime loans and leveraged corporate buyouts.
That, according to critics, would reward Wall Street for bad behavior. Shouldn't a hedge fund holding too many sub-prime bonds be allowed to fail and an investment bank stuck with unwanted bonds from a leveraged buyout take a hit to earnings?
