Q&A: How will Wall Street crisis affect average Americans?

By Kevin G. Hall

Q. Given all these risks, why isn't the government bailing out Lehman Brothers?

A. Bailouts are in the eye of the beholder. The Treasury Department and Federal Reserve determined that Lehman's problems had been well publicized since at least spring, other financial players had made adjustments to that and Lehman's failure thus didn't pose a risk of contaminating the broader global financial system the way the sudden failure of Bear Stearns would have if the feds hadn't intervened for it. But make no mistake, a bailout of Wall Street has been under way since last March, and deepened this weekend.

What the Federal Reserve began in March and expanded Sunday is the practice of taking all kinds of collateral in exchange for short-term emergency loans to investment banks. Previously, investment banks had never enjoyed this sort of borrowing because they aren't regulated the same way commercial banks are. The Fed now accepts as collateral a wide range of debt, securities and even the controversial mortgage bonds issued by the private sector and by Fannie Mae and Freddie Mac. The Fed also is now lending to financial institutions that it doesn't regulate.

That can be seen as a bailout because the Federal Reserve is putting lots of suspect collateral on its books. That puts the taxpayer on the hook should there be a failure.

Q. Is there any good news for consumers?

A. Yes. One immediate consequence of Monday's Wall Street earthquake is that oil prices sank sharply as investors fled anything considered a risky bet, despite Hurricane Ike's disruption of oil facilities in the Gulf of Mexico area. The price for contracts of next-month deliveries of oil fell almost $6 a barrel. If prices stay lower than $100 a barrel, inflation pressures should ease substantially. That means gasoline prices should drop in the weeks ahead.

Another positive is that pressure is building on the Fed to cut already historically low interest rates. It could happen Tuesday, when the Fed's rate-setting Open Market Committee meets, or it could come in October, but banks and corporations need capital, and cutting rates lowers the cost of obtaining it.

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