Until financial pain felt on Main Street, Americans unlikely to support
bailout

TORONTO, Sept. 30 /CNW/ - CIBC (CM: TSX; NYSE) - Public support for a bailout of Wall Street will likely only come after the average American directly feels the pain from the banking crisis - and by then the world's financial system may have suffered systemic damage, finds a new report from CIBC World Markets.

"In acquiescing to a sceptical Main Street, Congress voted thumbs down on the Wall Street bailout package, leaving the country's, if not the world's financial system exposed to further price declines in the U.S. housing market," says Jeff Rubin, chief economist at CIBC World Markets.

Mr. Rubin says that the rejection by Congress of the package reflects the huge and growing chasm that still exists between Wall Street and Main Street. "Notwithstanding the growing list of banking casualties in the U.S., and ballooning credit spreads, particularly for financial institutions themselves, Wall Street's crisis is yet to make a big splash on Main Street."

He notes that while floating-rate mortgages in the U.S. are up almost a full percentage point, car loans are getting harder to come by and leases for fuel pigs like SUVs are virtually unobtainable, minimal payroll and industrial production losses to date means that the average American has yet to feel much pain from the crisis gripping the financial markets.

"It is the very benign nature of today's downturn on Main Street that could pose the greatest danger tomorrow," says Mr. Rubin. "Without a material worsening in the unemployment rate or GDP growth, Main Street could well remain unimpressed with Wall Street's balance sheet ills. And it could still take a quarter of two before average Americans feel the full impact of what is happening to their financial institutions.

"Until they do, they are unlikely to become any more tolerant of a bailout package. For once, a much weaker economy may be needed, if only to put Main Street and Wall Street on the same page."

Mr. Rubin is concerned that "the financial system may not be able to tread water long enough before Main Street suffers sufficiently to get on board with a package. That's why it is so pivotal that a package come now, before systemic damage is sustained."

While neither the Canadian economy nor the Canadian housing market are as exposed to the U.S. financial crisis as their American counterparts, the roller coaster rides on the TSX recently shows that it is far more leveraged to the crisis than either the Dow or the S&P 500.

"Fears of a financial market meltdown do not bode well for investor sentiment towards commodities," finds Mr. Rubin.