In the wake of the recent government bailouts of America’s largest lending institutions, the Dow Jones Industrial Average plummeted more than 500 points on September 15, as investors began selling off shares in an effort to gain liquidity. The rapid decline on Wall Street was caused in part by Bank of America’s buyout of Merrill Lynch, as well as the bankruptcy of investment banking giant Lehman Brothers. Departing from mitigation measures used commonly over the past decade, the Federal Reserve Board drew a line in the sand on Monday, refusing to provide Lehman with overnight bailout funds. Analysts said the concept of moral hazard, or using the government as a crutch to enable irresponsible risk taking, had ruled the market until this week.
The effect may be muted in Santa Barbara, however, according to Bill Watkins, executive director of the UCSB Economic Forecast Project. Due to the area’s high concentration of wealthy and retired people, Watkins said, an impact may be felt, but that because most financial institutions facing trouble have already been bailed out, people are generally well insulated from economic catastrophe. Steve Cushman, a boardmember of the Santa Barbara Region Chamber of Commerce, posited that although the systemic problems faced by financial institutions can have impacts on lines of credit needed by area businesses, the state economy remains steady.