Wall Street isn't Main Street

The purchase of Merrill Lynch by Bank of America and the bankruptcy and collapse of Lehman Brothers are the latest -- albeit most dramatic - installments of the ongoing credit crisis that began last August 2007. The bailout of Fannie Mae and Freddie Mac, as well as the fire-sale purchase of Bear Stearns by JP Morgan Chase in March were also greeted with fear and dread, and if the past is any guide (which, by the by, it may not be), today will not be the final chapter.

The headlines are predictably hyperbolic, with words like "collapse," "stunned" and "shocked" repeated ad nauseum. It has also been widely asserted that the turmoil on Wall Street will be an unalloyed negative for Main Street, as credit conditions tighten resulting in further constriction of an already squeezed consumer.

Perhaps the doomsday scenarios will come to pass. After all, in an opaque world of hundreds of billions of dollars of leverage piled on the shaky foundations of low-quality mortgages, anything is at least theoretically possible. And the fact that the system has survived the shocks so far is no proof that it will tomorrow.

That said, there clearly is an echo chamber problem here. The people who report business news are for the most part in the New York region; the people who are employed in the heart of the financial industry are also in the New York region; and the analysts charged with assessing the health of the system and the integrity of individual companies work for the very institutions that are embroiled in the crisis. To expect this group to have any perspective on the current drama is equivalent to asking a resident of New Orleans their feelings about hurricanes and floods.

It is certainly true that Wall Street is facing major issues, just as it is true that in 2002 and earlier this year the airline industry confronted challenges that it could barely deal with in plunging travel volumes in 2002 and soaring fuel prices in 2007-2008. If you worked in the airline industry, it has been a critical and trying time, but hardly a systemic challenge to life as we know it. Granted, the problems in the financial system have wider ramifications: the creation of credit and the free flow of capital are part of the life blood of daily activity. Hence some of the worry.

Nonetheless, the echo chamber is a real problem, as is the self-importance of Wall Street ("we are falling apart, and we are the world"). This crisis is unfolding in the context of a global financial system, which while ungoverned is still real. There is at least $5 trillion in sovereign wealth funds and central banks, much of that in the form of $1.8 trillion in Chinese central banks, and several trillion more in the wealth funds of the Gulf region as a result of the massive transfer of dollars and euros for oil. Those sums dwarf the credit issues on Wall Street, and money does flow globally. The world isn't capital constrained; the financial markets aren't capital constrained; U.S. investment banks are.

As for Main Street, millions face foreclosure - there were 272,000 notices issues in July alone. But relative to the number of homes owned (approximately 110 million, of which 75 million are owner-occupied), foreclosures are still a small portion, and while that doesn't diminish the pain for those affected, it is not a systemic threat to society as we know it. The credit contraction combined with soaring oil prices has led to tightened straits for a majority of Americans, but that too is a far cry from collapse. Only if millions more lose their jobs can we begin to consider the possibility that economic activity contracts dangerously. As it is, while jobs have become more scarce and layoffs more prevalent, there haven't been the massive layoffs that are the necessary condition for severe downturn.

To say that things are not catastrophic says nothing about perceptions, fears, insecurities and real-world challenges of paying the bills, dealing with health care and education costs, and all the other problems besetting a substantial percentage of the population. But the idea that as goes Wall Street so goes the nation is a mistake that reinforces the self-importance of Wall Street and does nothing to address the challenges of Main Street.

Comments

[spartanspirit]

"High salaries for CEOs has nothing to do with the problem or solution. Football, baseball,and basketball players make a lot of money too. Does ARod making $25 million a year affect you or me?"
...not unless you invested your savings in a bet that the Yankees will win game seven of the world series and ARod strikes out while swinging at wild 'high risk' pitches in the bottom of the ninth...
Right, ARod gets his $$$ and the CEO's for Lehman and Merrill Lynch get their $$$
.... you get the shaft.

[wendynyc]

Wall Street is a joke - only works for a small number of insiders...

[RButler]

Don't worry. After this crisis passes in a few years or so, there will be the NEXT BIG SCAM. Now, if we knew what it will be we could get in early and get out before everything hits the fan and retire. How do we punish the greed that is responsible for these recurring fiascos? So far, those responsible are usually rewarded and rewarded handsomely.

[RButler]

How come you and I living on Main Street are held to a higher standard of financial accountability than the CEOs on Wall Street?

BTW. The excessive salaries of CEOs should be considered as an integral part of the current problems. They are usually discussed separately. The CEOs make out very well no matter how poorly their companies perform. Is that how you are compensated? In a way, politicians in safe districts have the same cushy situation. Unless everyone who contributed to this current collapse, Democrats and republicans, are voted out, the problems will continue.

[DuganS1]

High salaries for CEOs has nothing to do with the problem or solution. Football, baseball,and basketball players make a lot of money too. Does ARod making $25 million a year affect you or me?

[cylindar]

Yes, you are right. I would also like to add that I think this meltdown is the best thing that could happen to America. It will teach Americans a lesson to be more aware and responsible in regard to allowing such things to happen.

[freedog]

Clinton adminstration deregulation of the mortgage industry is to blame. This is a democrat problem, a congres problem.

[PDXKevin]

Started under Reagan... Pushed through in the 90's with Gingrich's "Contract with America" crowd, and hastened by Bush admin policies... I don't think you can pin this on someone who hasn't been in power for 8 years... and Republicans controlled congess for 6 of those 8.

[DuganS1]

Clinton beefed up Carter's Community Reinvestment Act in 1995, which increased the requirement for banks to lend to high-risk areas that they otherwise would avoid, and banks that failed to comply were forced to pay fines and have more difficulty getting approval for mergers and branch expansions.

[RButler]

I wish I were 'deregulated'. As it is, I'm highly regulated and a little slip and I've had it.

[DuganS1]

Actually you can go back to Jimmy Carter's "Community Redevelopment Act" which pushed for an increase in mortgage loans to low income folks. This push was significantly increased by Clinton in the 90s with an attempt to massively increase homeownership rates for minority families through loans called "sub-prime." Fannie Mae started to massively accumulate these sub-prime mortgages in the late 90s.

[Erdgeist]

I see where you are coming from. About the only thing financial markets make are bubbles in various sizes which we can bet on. Either bet on the bubble getting bigger (long) or bet on a bubble bursting (short). This doesn't have much to do with making nuts and bolts, tires, paper clips, engines, and clothes. Nor does it have anything to do with growing lettuce, collard greens or soya. The financial markets have grown too big for their own good. We need to get back to making real things and growing food; not viewing financial markets as privileged.

[ElkCreek]

Perhaps you are right to some extent, but like them, you also miss the point:

Wall Street intersects with Main Street, including the pension funds of a broad swath of middle America that are invested there, plus the housing / mortage investments). We have already seen what happens ie Enron, how people's pensions can just evaporate.

Obama needs to hit home this point - to make this real to average people, not just talk "policies".

[leftcoastindy]

3 to 4% of homes are forecolosed on this year ,and 3 to 4% next year, equals a huge adjustment in the coming years. Investors will only buy foreclosures, and ordinary people who need to change locations or lose their jobs will be devestated when they try to sell.

I can't see how the record amount of consumer debt won't drive us into a deep(er) recession.

Good Luck to us...we're going to need it.

[mnkors]

Investigate - and punish.

[cbeenthere]

I am no financier, but it was not long ago that Bush wanted to privatize Social Security, to me that meant that we could all gamble on Wall Street, would that have not turned it into Main Street?

[vegas9999]

I guess putting a small portion of your SS into CD'S and earning 3 times what you are earning now is a real gamble.

[jqcitizen]

vegas-
Probably just as good as it would have been had I put some of my paycheck into Trumps 'Bankrupt' casino, in Atlantic City.

[Zeje]

You don't earn three times a steady paycheck from a CD

[jqcitizen]

cb-
Like you I am no financier. I do consider myself very lucky that Social Security sends me a little check every month.
Seems like Bush and countless other millionaires would have been real happy if we had invested in outfits like Enron so 'Thieves' like his pal Kenny-Boy could have fun going bankrupt.
Isn't it just 'Great' that us taxpayers have the 'privilege' of bailing out Bear-Sterns, Freddie-Mac, Fannie-Mae, the Savings and Loan theft (years ago) and now Wall Street?

Have no way knowing about you, but I have never had an extra dollar to buy one share of stock in my life. I'm just glad the so-called leaders of this country haven't drained Social Security dry.--YET, that is.