Waves from Wall St. engulf most everyone

Ben S. Bernanke is scrambling to stave off a global financial crisis, but the turmoil already is hitting home.

The Federal Reserve chairman's extraordinary intervention to prevent the collapse of Bear Stearns Cos. on Sunday underscored the vulnerability of the financial system. If the investment firm had failed, central bankers feared a chain reaction that would lead to a meltdown in financial markets worldwide.

While the rescue was aimed at containing the impact of the credit crunch on Wall Street, signs of distress are already turning up on Main Street.

Consumers are finding it harder to get loans - for homes, cars, credit cards, and college tuition - as lenders can no longer sell them to intermediaries, like Bear Stearns, that formerly bundled them into securities and resold them around the world. Defaults on mortgages made with easy credit have driven up the risk to holders of such securities.

Businesses are also finding it more expensive to borrow money, making it difficult to expand and hire. Private employers have cut jobs in each of the past three months, and if they continue, consumer spending could fall, which would hurt the economy even more.

Recession fears have hammered stocks - the Standard & Poor's 500 index is down 13.1 percent since the start of the year - eroding the value of people's investments, from mutual funds to 401(k) retirement ac counts to college savings plans. And the dollar's fall against foreign currencies, a measure of anxiety over the US economy, has made it costlier for Americans to buy imported goods or travel abroad.

"There's a general sense of unease," said Samuel L. Hayes, finance professor at Harvard Business School. "People's sense of economic well-being is being compromised. I expect people will hunker down until they have a better idea of where things are heading."

Those who face rising interest payments on adjustable-rate mortgages, or who borrowed heavily against the value of their homes when credit was easy, may have no choice but to hunker down.

Even many homeowners who have fixed-rate loans and have built up considerable home equity have seen the value of their largest investment decline in the housing market slump. More recently, other lending markets - like the $300 billion market for auction-rate securities that finance college loans - have come under pressure.

"A lot of people are just up to their chin in debt," said US Representative Stephen F. Lynch, a South Boston Democrat who sits on the House Financial Services Committee. Lynch recently organized a foreclosure avoidance workshop in Randolph that drew about 400 people.

More cautious consumers, and a tighter credit market for businesses, are forcing some companies to scale back. Next month, for example, Georgia-Pacific LLC plans to close its plant in Franklin, which makes boxes for manufacturers and food companies, idling 111 workers. "When industry drops off overall, so do boxes," said Melodie Ruse, spokeswoman for the paper products company based in Atlanta. "It's the economy."

On the financial side, Robeco Investment Management Inc. recently notified Massachusetts officials that it plans to cut 15 jobs in Boston and 115 in its New York office in a mass layoff tied to tougher conditions in its mutual fund and asset management business.

"Companies will have to tighten their belts, which could affect people who work for the company, and that's how it trickles down," warned John Bitner, chief economist for Eastern Bank's investment unit in Boston. "Ultimately, that will tend to weaken the economy and make the recession more severe than it would have been."

At this point, though, not all financial specialists think the economic downturn will be long lasting.

"My best guess is this is going to be a relatively modest recession," said David Wyss, the chief economist for credit rating agency Standard & Poor's in New York, citing its similarity to the early 1990s recession driven by financial and real estate problems. "But nobody knows how long it's going to take for the markets to hit bottom."

Dennis Kelly, the chief executive of Bristol County Savings Bank in Taunton, said many of his customers are facing pressures stemming from declining home values and aggravated by the soaring costs of gasoline and heating oil. "What's happening is that the problems stemming from the housing crisis are having a ripple effect," he said.

The mix of economic woes has made it harder for companies to capitalize on their assets, and for individuals to tap into their homes and savings. "What's going on here is a massive global de-leveraging of the system," suggested Paul Deninger, the Waltham-based vice chairman of the Jefferies & Co. investment bank.

That intensifies the worries of ordinary people over the value of their homes, the security of their jobs, and the shrinking of their savings and spending power. And negative psychology, which damages consumer confidence, can be part of the problem.

Still, Harvard's Hayes said the Fed has more tools at its disposal to combat the current downturn than it has had in the past, including the expansion of its lending authority that smoothed the sale of Bear Stearns to JPMorgan Chase & Co. over the weekend.

Hayes also cited the role of America's overseas trading partners in easing the Wall Street financial crisis, notably investments from government-owned funds in Asia and the Middle East in struggling US investment houses. "We're a global economy now," he said. "There are a lot of resources around the world that have a stake in stability.

Robert Weisman can be reached at weisman@globe.com and Ross Kerber at kerber@globe.com.Globe staff writer Todd Wallack contributed to this story.