To hear some presidential candidates tell it, it’s time for the US Government to offer the same buyout for home-owners as for Bear Stearns. Forget for a moment the utter complexity and real danger of that action—the suggestion makes a distinction between Wall Street and Main Street that is completely false. We only have to look to the Northrock collapse in Brittan a few months earlier to see that.
Consider: March 17, 2008 – America wakes up to find that Bear Stearns finds itself crippled with illiquid assets. The company is finished; business ends. Everybody goes home—okay, so lots of them do—and they take their belongings with them. Bear Stearns' call upon its existing credit lines puts stress upon the banking industry. Bank of America (BAC) and a dozen other national banks find themselves unable to respond to the call. The downward spiral of layoffs, (further) delinquencies and foreclosures, and stress on the credit market would certainly create a run on the bank not unlike what we witnessed with Northrock. Wall Street would go home to Main Street and call it a day—only to wake up to a sheer fall in the stock market, paralleled by an equally steep rise in unemployment and personal bankruptcy (remember, Americans carry personal debt—not counting primary or secondary mortgages) of nearly $10,000 per family). Rise in available labor creates downward pressure on salaries. But many Americans are just getting by—their income matches (if that) their expenses. A reduction in salaries—caused by an increase in available labor, caused by a steep rise in unemployment—tips the scales. A sudden need for cash by individuals in turn means the liquidating of market holdings at the best available rates (at a loss). The sudden decline in stock values reduces the book value of companies who have collateralized their company against lines of credit (not to mention existing debt). Worth less, they borrow less, grow less, hire less, pay less, and the cycle repeats.
Like George Bailey said in It’s a Wonderful Life, Wall Street can say today, “I don’t have your money here. Your money is invested in the Wal-Mart and the local hardware store. And they don’t have your money either. They have soap and bolts respectively.” Bank of American has invested my money in Bear Stears—and I let them do it. In return, they give me interest.
Folks—Wall Street is Main Street. The fact that some don’t think it is—the fact that these prospective leaders somehow suppose the Government can ad hoc the deliverance of poor, personal, financial decisions, with fiat money—is grossly naïve and laced with ignorance (def. lack of knowledge).
But then again, it’s what we have come to expect from some segments of the political realm.