$1 trillion cost of Congress failure

Wednesday 1st October 2008

The failure of Congress to sign a $700 billion rescue package for Wall Street cost Americans on Main Street $1.1 trillion because of "pigheadedness and politicking", it has been claimed.

Monday saw the Dow Jones rocked by the House of Representatives voting down the emergency economic rescue bill – recording its biggest points drop in history.

Research by Datamonitor shows the failure to secure a bill wiped $1.1 billion off the price of shares owned by US citizens on Wall Street.

Michele Gorman, lead wealth and investments at Datamonitor explained the reaction to the bill failing was "immediate and violent" and laid the problem on "pigheadedness and politicking".

Over the few day governments across the world have been forced to pump cash into failing banks – such as Bradford & Bingley, Fortis, Washington Mutual, Glitnir in Iceland and Dexia in France and Belgium – but Ms Gorman claims these measures are "simply plasters on an increasingly ill patient".

"The system is broken, and requires a major operation to fix," she said.

"Unfortunately America's politicians failed to convince Main Street of the impact that dragging their feet or worse, doing nothing, will have on their futures. With five weeks to go before their re-election, not enough elected officials were willing to take their role as 'leaders' seriously enough to educate their constituencies about the cost of failing to act decisively."

It is estimated regular Americans hold around $11.6 trillion in equity investments, through direct holdings, pension funds and mutual funds.

With 9.5 per cent wiped off the Dow Jones industrial average (DJIA) on Monday, the American people lost in the region of $1.1 trillion.

Since October 2007, $3.6 trillion has been lost.

Wall Street did record a bounce yesterday amid hopes a deal could be forged in Washington. The DJIA rose 4.77 per cent.

"Of course the cost to the rest of the world’s economies is much bigger than individuals’ negative investment returns. After all, the root of the problem is illiquidity as banks hoard cash," Ms Gorman said.

"Unless and until they start lending again, to each other and to households, the global financial system cannot recover.

"The result is increased unemployment as companies fail to get the capital they need to grow, or even stay in business, and hundreds of banks fail."

She added it was unclear if any would be strong enough to unclog the lending markets after the compromises that will be necessary to convince the majority of US lawmakers to vote for it.

"In the meantime uncertainty about who’ll fail next is making the world’s investors desperately search not for a return on their investment, but for a return of their investment," she concluded.

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