Wall Street vs. Main Street

It continues to be all about the rescue plan, U.S. senate votes today

The U.S. stock markets followed the tremendous losses on Monday with big gains on Tuesday.  Volatility continues to dominate with the central focus still being the rescue plan.  The Senate will vote today and if approved it will give the markets a short breather.  The House of Representatives would then follow up with another vote.

Debate: Rescue or bailout?  Wall Street vs. Main Street.

There is a debate going on over whether there should be a rescue plan or not.  Those who are against it argue that taxpayers should not have to pay the bill.  They believe that those who got us into this mess should not be bailed out from their risk mismanagement and that they should learn from their mistakes.  This side of the coin looks down on Wall Street for its evil ways and therefore believes that Main Street should not have to pay for it.

Unfortunately, I must reiterate something that Paulson repeated in his meeting with Congress: “the taxpayer is already on the hook“.  We could not isolate Wall Street from Main Street; sometimes Main Street does not understand its connections with Wall Street (wait until they see their pension plans and 401ks).  Letting financial entities fail would affect taxpayers more than the rescue plan would.  Main Street says, “Sure, let them fail!  They need to punished for their mistakes!”  The bottom line is that a little bit of punishment is ok, but it must be controlled.  (Fallout of Bear Stearns and Lehman not enough for you?).  The consequence of letting more entities fall would be painful for everyone, a hard hit to the economy, a lack of confidence and more unemployment.  The credit markets are suffering, the financial system is in danger.  Corporate investments would dry up; good luck getting a car loan, a mortgage, or even using your credit cards!

So I say to you: Allowing more punishment to Wall Street means more punishment to Main Street.  But I beg your pardon:

Aren’t we all to blame?  Shouldn’t we all bear some responsibility?

Now it’s your turn to answer: “me? what did I do?”

For a long time, average citizens have forgotten what it feels like to have cash in their pockets.  Instead they filled up their wallets with credit cards.  It was a danger to many as swiping their cards was much easier; we became consumer addicts.  We were credit junkies, credit was so easy to come by, rates were low, “bills would be paid off eventually,” we said to ourselves.  I’ll make the minimum payment at the end of the month, easy enough.  Our savings were down, credit was up.. So, where was our risk management?

Let’s speak about mortgages.  Here, there’s plenty of blame to go around.  Speculation was booming all over the housing market.  Many people were buying second homes, but guess what?  We could only live in one place at a time.  That second home is purely an investment.  Banks were handing out mortgages to everyone, even people with poor credit ratings.  Home prices were rising and everyone wanted a piece of the action.  If I were to buy a house I would make sure I could meet those monthly payments.  Some people were honest, hard-working people looking to buy a decent house to live in, and for those who had to go into foreclosure my heart goes out to them.

Now with falling home prices, banks and investment firms are stuck with mortgage-backed assets that continue to lose value.  Cash flooded the housing market from everywhere to rake in some nice returns but that is now gone.  All those loans, bonds, and other assets that were created to fund these investments could not be repaid and risk going into default.  It spiralled out of control.  Result: writedowns, provisions, losses, and more losses.  The credit market is damaged, the financial system could be in danger, and this eventually trickles down into the economy.  Even if you’re a farmer that thinks he has nothing to do with the financial markets.

We’re heading into a recession, but that does not necessarily have to be a bad thing

A recession does not have to be very painful.  The goal here is to avoid panic or a market crash.  We do not want people running to their banks to take their deposits out.  Sometimes recessions are necessary; the key issue is to smooth out the cycle so that the recession is short-lived and does not hit us hard.

Recession could be positive because markets tend to correct themselves during these times.  Prices adjust to reasonable levels.  Prices that were previously driven higher or lower because of excess speculation start reflecting more accurate valuations.  People are driven by emotions and by what other people do; as house prices moved higher and profits were high, everyone jumped in to the point where it stopped being reasonably affordable.  Maybe that house you always wanted will reach a price you could afford but by then everyone will have rushed all their money into something else that generates the best returns.

Recession is ok but let’s limit the damage to the economy and let’s not lose too many jobs.

Then we could all concentrate on what will be the next bubble.