FROM HUFFPOST | SEPTEMBER 15, 2008
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.