NEW YORK—Turmoil on Wall Street is pushing financial professionals to the therapist's couch, cutting into retirement funds and testing the mettle of small investors caught in the vortex.
With investment bank JPMorgan Chase & Co agreeing to buy stricken rival Bear Stearns and the U.S. Federal Reserve stepping in to prop up securities firms and cutting interest rates another 75 basis points Tuesday, everyday Americans are feeling the squeeze.
The state of the economy is now the major issue in the campaign for the U.S. presidential election in November and various polls show consumers are turning gloomy and believe the economy is in recession.
The Fed slashed benchmark overnight rates by three-quarters of a percentage point to 2.25 percent Tuesday, making for a combined cut of 3.0 percentage points since mid-September in a bid to revitalize the economy.
The rate cuts diminish returns for older people who have shifted their retirement portfolios to safer investments like government bonds and money market accounts.
Judy Bridges, 68, a writing teacher in Wisconsin, said the retirement fund for her 91-year-old aunt living in a $6,000-a-month nursing home is about to run out.
The Federal Reserve on Tuesday slashed U.S. interest rates by a hefty three-quarters of a percentage point in another step to try to contain a fast-growing financial crisis.
Following are the presidential candidates' reaction to the moves:
Republican John McCain, Arizona Senator
McCain has the "utmost confidence" in Fed Chairman Ben Bernanke and supported his decision to step in, senior adviser Douglas Holtz-Eakin said by phone.
Asked if federal funds should be used to bail out Wall Street, Holtz-Eakin said: "If the financial system were to worsen considerably from where it is now, it would put at risk too many jobs, and so policies have to be devoted to shoring up that financial system. Those are appropriate policies."
Speaking before the Fed took action last week, McCain said he hoped a bailout would not be necessary.
"Bailout always have intended consequences and unintended consequences," McCain told reporters on his campaign bus. "After the savings and loan crisis (of the 1980s), I think we all knew the government had to act. But we wasted billions."
Democrat Hillary Clinton, New York Senator
Speaking shortly before the Fed action, Clinton emphasized the need to address the home foreclosure crisis and said cutting interest rates would not be enough to fix the economy.
"Driving the cost down hopefully will spur some economic activity," she said in Philadelphia. "I don't think that alone will fix our problem."
"If we don't deal with the home foreclosure crisis, the economy will not recover."
Democrat Barack Obama, Illinois Senator
Obama said it was too early to talk about taxpayer-funded bailouts but added that government officials must ensure that Wall Street's woes do not take a huge toll on the broader economy.
"It's premature to start talking about taxpayer-funded bailouts," he told reporters while campaigning in Monaca, Pennsylvania.
In a separate statement, Obama urged passage of legislation that would encourage lenders to buy or refinance failing loans, which he said would prevent more foreclosures.
"This is not a bailout for lenders or investors who gambled recklessly, and it is not a windfall for borrowers," Obama said in statement. "It is a fair and responsible way to help stem the foreclosure crisis."
He criticized President George W. Bush for failing to take steps to prevent the crisis but had praise for Treasury Secretary Henry Paulson and Bernanke.
"Frankly I think that Secretary Paulson is—along with Ben Bernanke—are taking some creative steps to deal with the issue and I'm encouraged that they're trying to act swiftly to prevent further erosion in the markets," he said.
"As the interest income on her investments retracts, we get nearer and nearer to the day where she will have to go on (state aid). ... We'll need to pick up the tab," Bridges said. "I'm glad she doesn't know what is happening to the money she worked so hard to save."
People are voicing concerns as they see businesses slump, friends laid off and ballooning mortgage obligations surpassing the value of their homes.
"We're the savers and that's what we've been doing, and then the banks became very greedy. They lent all of this money through the mortgages," said Jim Maki, 69, a retired art teacher in Shorewood, Wisconsin. "The banks took big chances with basically all of our monies that we put in the bank."
Election Year Politics
The Fed is also bailing out securities firms—extending them credit and helping JPMorgan reduce its risk in the Bear takeover—while small businesses struggle.
"It seems to me all we've done is transferred the risk from the private sector to the taxpayer," said Larry Clanton, 59, a Michigan man whose vehicle detailing business recently failed.
"A lot of it is just politics. In any election year, there's always stuff going on with the economy in Washington that you don't see in the other three years," Clanton said.
James Masten, a psychotherapist near Wall Street, has noticed anxiety from patients about layoffs and said the downturn was putting stress on couples.
"The process of witnessing the layoffs is very demoralizing and it undermines self-esteem and ability to work," he said.
But Masten did not expect to see brokers leaping out of windows as they did during the stock market crash of 1929.
"Just as there are structures in place—at least I hope there are as an investor—to prevent the market from collapsing, there are structures in place to prevent people from collapsing," he said.
In Los Angeles, information technology developer Mark Lea, 47, was especially pessimistic: "There's absolutely nothing good in the American economy. "The only thing worth investing in is coastal real estate."
People in the construction business in Phoenix might agree. Fallout from the mortgage crisis has hurt the building sector in one of the fastest-growing U.S. cities.
"The large builders are in big trouble; a lot of the small builders have gone out of business," said Steve Cheifetz, a Phoenix construction attorney. "The subcontractors that we work with, a lot of them are letting people go or diversifying."
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