The world today revolves around credit. Most businesses today use debt to finance their operations. Very similar to consumers using credit card for Christmas presents. Not just long term debt (ex. Debt to build factories, or equipment) but short term debt (ex financing of accounts receivables, seasonal credit lines). If the placement of debt stops then business large and small will be in jeopardy. The best analogy would be if your credit cards were turned off just before Christmas.
If these loans do not continue to be available to corporations then business will stop. What does that mean to the typical American worker? It means corporate layoffs, slowdown of growth and in many cases corporate bankruptcies.
This is why the government bailout is so important. After the bailout banks should be able to go back to lending again; albeit at very different terms than just a few weeks ago. Banks will be much more conservative over the next few years.
The problem with the bailout is that the government is now going to have a lot of bad loans to deal with. For investors this will be a great opportunity but for borrowers this will create problems for many years to come. All this distressed debt is going to create an overhang in the debt market for the many years to come. Debt markets will be soft for the next 5 years making borrowing difficult but at least not impossible.
In a few minutes we will see the effect on Wall St. of the bailout plan; unfortunately we will not see the effect on Main St. for many years to come.
The credit markets have to keep in alignment if the country does not want to sink into a depression let's just hope that the effects of this bailout do not create a long term recession.
Feel free to ask any questions.
Nick
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