Will Wall Street Fall Back To Earth Or Stay Hanging In The Sky?

I visited Wall Street after the close of the market on Monday and was struck by how normal everything seemed. There was a chill in the air, hot pretzels were for sale from street vendors, tourists were snapping pictures, and workers were (mostly) eager to get home.

I followed the news during the day and was surprised by how completely the market recovered from its initial drop. Rational thinking person that I am, I had expected the news of the Feds forcing Bear Sterns to allow itself to be bought by JP Morgan Chase at the fire-sale price of $2 a share combined with the unknowable answer to the question "How many more Bear Sterns are out there?" to put more of a damper on the day's results. I had expected the fact that the Feds had ponied up $100 billion of the taxpayers' money last Friday and another $30 billion over the weekend to make the Bear Sterns deal happen and ostensibly "save" the economic system from collapse to make more of an impact on these people.

Silly me. I've forgotten the power people have to convince themselves that -- because everything looks normal on the outside -- everything really is normal.

A lot of people are out a lot of money thanks to the bankruptcy of Bear Sterns. I hear one of their investors lost $1 billion of his own money. But something tells me that guy has plenty of other billions where that came from. So, he'll be okay.

However, I can't get past the feeling that the calm I experienced visiting Wall Street -- including the conversation I had with two guys who didn't want me to know where they worked but really seemed to accept the idea that the government would do whatever it took to keep the banking system together like it was no big deal -- was the result of a whole lot of wishful thinking. (By the way, the two guys I spoke with had never heard of the plan Eiot Spitzer and the other states' attorneys general tried to put in place to protect banking customers from predatory lending practices. That really is an under-reported story!)

You know what kind of wishful thinking I mean, right? I mean like what the Coyote thinks when he runs so fast after the Road Runner that he keeps running even though he's now in mid-air, having taken a wrong turn on those winding mountain roads. At least initially, he never seems to mind that there's no longer any road under his feet to run on.

Of course, I hope I'm wrong. The Coyote always does eventually realize he's in trouble... and falls a long way back to Earth.

On a more serious note, in reporting on the days' events, The New York Times says...

Despite those efforts, financial conditions have worsened. And specialists say the latest measures might meet the same fate if banks and securities firms do not put to work the new money the Fed is offering to lend to them.

"The Fed can do no good at all if they effectively print money and give it to the banks, and the banks dig a hole in the ground and put it in there," said Donald Brownstein, president of Structured Portfolio Management, a hedge fund in Stamford, Conn., that specializes in mortgage securities.

Other investors are worried that the Fed's extensive intervention will put the central bank at risk of significant losses and that it will create a "moral hazard" by bailing out institutions that should be allowed to fail. And some complain that the Fed's backing for a $30 billion loan to Bear Stearns by JPMorgan shifts all the risk to Washington while keeping the profits on Wall Street.

"The government is taking all the downside and none of the upside," said Douglas A. Dachille, chief executive of First Principles Capital, a bond trading firm.

On Wall Street, however, the Fed's moves, especially its decision to lend directly to 20 securities dealers, were welcomed.

This moral hazard concept -- where the government crosses the capitalistic system line by bailing out corporations that should, ordinarily be allowed to fail -- really interests me. Apparently, there are people who really do want us to live in a "real" capitalistic system... where if you run your company into the ground then you should be forced to leave it there, unless you can get it going again on your own. But it seems we don't really live in a purely capitalistic system. It's more of a hybrid system... especially if you factor in the many, many billions of dollars the Pentagon spends on "cost plus" contracts. ("Cost plus" means the corporations are guaranteed to be paid the total cost of providing whatever they are providing to the Pentagon "plus" a guaranteed, fixed percentage of profit. I think another name for this way of doing business is Socialism, but I could be wrong.)

If nothing else big happens, perhaps this time we're just at the beginning of going through will turn out to be a "teachable moment" regarding the true nature of America's economic system for the American people as a whole. I think it would be really useful if the American people learned that their government really isn't against financial failure after all. Then they might demand that their representatives in Congress spend their tax dollars to prop up more ordinary people when they fall on hard times.

As Americans get used to driving hybrid cars, perhaps their congressional representatives will become comfortable with getting us all into some form of "hybrid Capitalistic-Socialistic" system. It sure would be nice if America became the country known as the place where people can take risks... but know that there will be someone there to catch them when they fall. Sort of reminds me of what a good friend once pointed out is the very last sentence in the Declaration of Independence...

And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Maybe when Wall Street falls back to Earth, it will be different kind of Earth -- a more humane and compassionate one -- than the one it was on before. Compassionate Capitalism anyone?

By the way, I made a video of my visit to Wall Street. It runs about 2 1/2 minutes and has a surprise ending. I hope you enjoy having a little experience of what it was like to be there.

Follow Steven G. Brant on Twitter: www.twitter.com/SteveBrant

Comments

[peterg76]

"...the Fed's backing ... shifts all the risk to Washington while keeping the profits on Wall Street"

Missiona accomplished!