Wall Street IS Main Street
With the housing bust still generating large headlines, hysterical commentary about the property market and its alleged victims continues to dominate the discussion. Forgotten in the renewed rise of economic populism is the basic truth that Wall Street’s success is Main Street’s, and just the same is Main Street’s success enjoyed by Wall Street.
In a column last week, the Wall Street Journal’s David Wessel wondered whether taxpayers should foot the bill of a housing bailout supported by Rep. Barney Frank and Fed Chairman Ben Bernanke since “so many American houses are worth less than their mortgages.” What’s remarkable here is that falling values are considered an issue at all.
Last this writer checked, investment of any kind is uncertain. If housing, equity or art purchases offered only rising returns, those seeking to enter any of those markets would frequently be shut out. It is because investment is uncertain that markets have traditionally been allowed to clear at lower prices such that the distant object of home, equity and yes, art ownership, has become a reality for Americans to varying degrees.
Efforts to insulate the property markets from what some deem their sharper edges will enervate the economy first for encouraging all manner of speculation on what would become a “protected” industry and sector. Secondly, protection works at cross purposes with Nanny Washington’s other stated goal: rising wages for the alleged “working class”. If housing is turned into a certain bet, a great deal of capital will be reoriented toward the ground rather than to entrepreneurs with less innovation and lower wages the certain result.
It should also be asked if the various economic commentators supporting a bailout have ever heard of margin loans. The latter, when applied to equities means that investors of all stripes are able to achieve greater exposure to a certain company or market index while not fronting the full amount of cash needed for same. Where margin is considered, investors have frequently gone “under water” in the form that certain homeowners have.
The above method of investing of course resembles home ownership in some ways, so imagine for a moment what our economy would look like if margin bets were protected too? If so, lots of capital would be locked up in former stock-market luminaries along the lines of GM, Enron and Digital Equipment Corporation such that capital for tomorrow’s innovators would be in lower supply.
Many might say that protecting Wall Street is different from protecting Main Street. And there lies a persistent myth. Indeed, lost in the absurd “Wall Street” versus “Main Street” discussion is the basic truth that Main Street’s interests fully intersect with those of Wall Street. For those who doubt this, they need only consider the microscopic percentage of Americans who actually lack exposure to the stock and capital markets. To the extent that any Americans don’t possess brokerage accounts, 401(k)s or pensions with stock-market investments, they frequently work for companies and/or individuals whose ability to pay them has a Wall Street origin. In the end, Wall Street is Main Street.
And there lies the folly of Wessel’s seemingly insouciant countenance toward Rep. Frank’s approach to the mortgage crisis. According to Wessel, “Mr. Frank would offer lenders and eligible borrowers a deal: If the lender agrees to cut the debt so the homeowner owes no more than 90% of the house’s current value, and the Federal Housing Administration determines the homeowner can afford a new loan, then the lender gets rid of the mortgage and the FHA insures a new mortgage for the remaining balance.” Life’s so easy when the taxpayer is on the hook.
Unfortunately, what Wessel ignores is that mortgage holder and taxpayer are one and the same. And to the extent that they’re not, his casual approach to reaching into the pockets of responsible Americans to fund the profligacy of those who are not reeks of shortsightedness. Implicit in Wessel’s point-of-view is that if Uncle Sam simply comes to the rescue one more time, all will be fine. Not very likely.
Thankfully, a White House and Treasury that have sadly sought to soften the blow of the housing downturn are not on board with Frank’s plan. To Wessel, it’s “a bit jarring to hear the Treasury vilifying people who are acting in their economic self-interest.” What Wessel misses is that owing to broad-based American exposure to the securities markets, efforts to bail out homeowners on the backs of lenders means that if lenders get a “haircut” on mortgage payments, so too will the very individuals struggling under the weight of mortgage debt. As Nobel Laureate Robert Mundell long ago noted, “the only closed economy is the world economy.” Amen.
Though he wisely suggested during his confirmation hearings that he would refrain from commenting on politics and policy, Fed Chairman Bernanke has said, “If a foreclosure is preventable, the economic case for trying to avoid foreclosure is strong.” Absolutely. Forgotten amidst all the housing hysteria is the certainty that both borrowers and lenders have strong incentives (credit ratings for borrowers, earnings for lenders) to avoid foreclosure. That being the case, our minders in Washington should step aside and let those two interested parties work out a deal; one that by definition will aid Wall Street and Main Street entities that are inextricably linked.