Thursday, April 30, 2009


Something about the current financial crisis has been bothering me. In the early days of the crisis there was a lot of talk about helping Wall Street but not Main Street. At first it seemed to just be a nice shorthand used by the media. But it got me thinking. What is the difference between Wall Street and Main Street?

Main Street, in this shorthand, represents the manufacturing, wholesale, retail and service businesses that interact directly with each other and the public. Main Street then, is us. Wall Street, again using the media shorthand, are the buyers, sellers and brokers who buy, sell and trade what are called Financial Products. Stocks, which are shares of a business, bonds, which are the debts of a businesses and a complete alphabet of other stuff like CDOs, CDSs, MBSs which seems to be were the problems started.

Here, in the real world, people and their businesses make things and sell things and buy other things and create real and tangible wealth in the process. In the financial world it seems that those people and their businesses only buy, sell and trade various chunks of the wealth of the real world and in the process create huge amounts of what, for lack of a better term, I call Vapor Wealth. If you look too hard at it, it fades from view. You can never get a firm hold on where all that money comes from, but there sure does seem to be a bunch of it. The problem is, it's not real!

The entire financial industry seems to be built on this Vapor Wealth. They buy debts and obligations from Main Street then slice it and dice it and sell the combined pieces to each other at a profit. Then those buyers slice and dice what they bought and resell the pieces to yet more buyers, again at a profit. Then...well it just keeps going. And at each transaction a broker of some sort acts as the intermediary between the parties and makes a profit. And some of the buyers gather together into funds and someone has to manage all that buying and selling and they make a profit. So the question that keeps rattling around in my head is, were the hell does all that profit come from? And make no mistake, it's large sums. Remember the AIG bonuses. That $135 million was for 92 people in just one division of that monster firm.

You see, here in the real world of Main Street we deal with the $830 billion, or so, of circulating cash money. That's it. Add up all the bills and coins and you get around $830 billion. We also, of course, deal with assets. Real estate, buildings, inventories of things, etc. So all the cash and all the assets make up the real economy. So long as we can mine or harvest or catch the raw materials, and then process and market the finished products, the Main Street economy creates wealth. But the world of Wall Street only "creates" Vapor Wealth. It only exists on paper or, in today's world, in a computer. Profits begetting profits which beget more profits on and on and on. Everybody stays fat and happy so long as none of the players tries to convert all of their Vapor Wealth into Real Wealth. That seems to me to be the ultimate cause of our current problem. All it took was a break in the chain of profit generators. In the current crises, when adjustable rate mortgages reset to much higher interest rates and, more importantly, much higher payments, it caused some home owners to default and stop paying. Up the profit chain the profit flow started to slow down. The value of certain Vapor Wealth paper fell. Traders couldn't get the price they wanted as they attempted to convert to either other Vapor Wealth products or even Real Wealth. The house of cards came tumbling down.

That helps explain were we are. Now the problem is what to do about it. I disagree with the Republican argument that spending large sums by the federal government is the wrong tack, but I'm afraid that the Obama stimulus plan attacks the mess from the wrong direction. Let me explain. The GOPs first arguments were that FDR type government spending wouldn't work because it didn't work for FDR. "Only the US entering WWII got us out of the Great Depression" they said. We don't hear that argument any more, probably because some staffer in a GOP congressman's office pointed out that WWII was MASSIVE spending by the federal government. Oops, well never mind.

So, if we have a history that massive government spending can bring the country out of depression/recession, what could be wrong with the Obama plan? As I said above, I think that it's misdirected. The plan (and the TARP plan passed under Bush) call for putting money in at the top. Bailout the investment banks and the money will pass (trickle) down to the commercial banks, then to business borrowers who will keep or expand their work forces, who will then buy goods and homes and all will be sweetness and light. BS! The profit on profit on profit crowd is not were we want to direct government monies. As we've seen with the first $350 billion of TARP money, Treasury Sec. Paulson waved his hands, the stage filled with blue smoke and...Shazam...the money just disappeared.

Why, you ask? Here are three reasons.
  • Trickle Down Economics doesn't work. Of course, that economic theory deals with tax cuts for the top earners or companies, but isn't giving government money to one group or another the same as a tax cut? We can pour money in at the top day in and day out and it will keep disappearing until the profit takers and brokers and fund managers have made back their "loses." Then we'll see some small percentage reaching Main Street. Too little and way too late.
  • The problem started on Main Street. It's like your doctor treating you for anemia and low blood pressure without first stitching closed the large cut on your foot. People without jobs do not buy new cars or homes and, if new lending regulations and practices have any meaning, they shouldn't be allowed to.
  • We're not following the historic example. The massive government spending for WWII did not go to investment bankers or hedge fund managers. It went to buy real things. Tanks and plane and ships were bought and paid for. Uniforms and canteens and belt buckles were made and then made again. Just because most of the stuff bought with government funds was used up or destroyed in the war doesn't mean that real wealth wasn't created. It clearly was.
So, what should we do? Parts of President Obama's stimulus bill come close. The federal government should funnel large sums into renewable energy projects. Not just R and D but actual projects. Wind farms in the Midwest and off the coasts. Solar projects both large and small. We should make the massive investments needed to have real high speed rail. Make it a public/private partnership deal. If the French and the Japanese and the Koreans can do it, why can't we! And can we please fix our infrastructure. No, it's not sexy, it's just necessary.

Or, we could just do what the Daily Show's Jon Stewart suggested. Give the money to people so that they can pay off their mortgages. Trust me, if we push the money in at the bottom it will make its way to the top soon enough. It always does.

No comments: