Why Should Main Street Care What Happens On Wall Street?

[jyl]

A question we hear a lot lately is "why should the federal government commit hundreds of billions of taxpayer dollars to support the financial system"?

Many people feel disconnected from the current financial crisis. They see no reason why a "regular Joe" should care what happened/is happening to Bear Stearns, Lehman Bros, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, etc - or about what may/will happen to Citigroup, Bank of America, Wells Fargo, Wachovia, Morgan Stanley, Goldman Sachs, etc. After all, most of us see the stock market go up and down daily, with no obvious impact on our income or life.

I wanted to start this thread to discuss this topic:

What is the connection between Wall Street and Main Street?

Do financial crises impact the so-called "real economy" of our daily lives? Why, and how? When does a financial crisis merit govt intervention? What kind of intervention should we allow? Are there historical examples, from the 1930s, 1970s, 1980s or otherwise, of govt intervention that was justified and worked?

Please discuss your views. I have some views and charts that I'll try to gather and post later, but I'm not going to lead off.

[Hugh R]

So how does it affect me personally? Not a whole lot, right now. With the nanny state and all this bailing out. I think it will affect my kids and their kids a whole lot. As I understand it, the National Debt will now be $10.1 Trillion with an annual Federal budget of $3.3 Trillion and putting $250 Billion a year into paying down the National Debt.

Put this in simple household terms. Knock a few zeros off to simplify. I have $101,000 in credit card debt, I bring in $33,000 in annual income and I'm paying of $2,500 annually on the card. Do you think I'm ever going to pay that credit card off?

[Rick Lee]

I don't think these bailouts will have a net cost of anything close to the amount of money we've been hearing on the news every day. It's not the gov't. just writing a check to wipe away bad debt. They're getting some valuable assets for pennies on the dollar in exchange for the bailout. Some of those assets will be worthless. But still, the vast, vast majority of homeowners are paying their mortgages on time and so those MBS's will retain their value. Theoretically, the gov't. could even turn a profit by all this, though I'd be overjoyed if they just came close to breaking even.

[legion]

How does it affect the average Joe?

Well, their employer is feeling the credit crunch, and put off expanding, if not contract their business based on the credit they can get.

[tabs]

They will know it when they get laid off, lose the house the car the TV and have to declare BK.

[jyl]

Here is a chart that shows one connection btwn Main Street and Wall Street. Illustrates legion's point.



Note the capex chart is plotted w/ a 3 qtr lag to the credit conditions chart. "C&I" means commercial and industrial.

[turbo6bar]

Originally Posted by jyl

Do financial crises impact the so-called "real economy" of our daily lives? Why, and how?

Flow of credit and velocity of money. If crises create inflation or deflation, then Main Street feels it. I am personally wrestling with the decision to start growing in real estate again or sit tight. Can I replenish funds (via credit) after going on a spending spree?

When does a financial crisis merit govt intervention?

I'm a laissez fair dumbass. However, I believe (and I could just be venting anger) govt intervention should be accompanied by some legislation or regulation. If these guys are too big to fail, then we should eliminate the big dogs. If leverage was the culprit, manage reserves better. I believe our ultimate undoing was an unusually long period of low interest rates due to mis-pricing of risk. There were too many dollars chasing too few quality investments.

The chief issue here shouldn't be how much it will cost, but rather, how can we prevent it from happening again. Rampant housing appreciation is a big factor in this crisis. As bad as it seems, we must be willing to target the mechanism(s) that permitted it. If we are prepared to act during the bust, we must be equally willing to act during the boom/bubble.

What kind of intervention should we allow?

Intervention which ensures the same players never get a second chance.

[RoninLB]

Successful Gov't intervention isn't a done deal yet.

Without a Debt mkt there is crisis. Try finding a mortgage in one. I did.

Wait a couple of weeks so we can see what kind of bs DC has in mind that connects to their electioneering. RTC was simple. Send a bunch of CPA's in to do a workout. This is not a pure RTC workout. This has to be a market opener.

The only thing logical from DC is that Pelosi accepted that something has the be done pre election. Who knows about the Senate? Then tv bs from the parade of ass holes putting forth their populist message and scamming a few $B for some Dem/Collectivist policy.


as for joe 6-pack? all he knows is that there are jobs available or they're not.




good subject

[VaSteve]

Originally Posted by turbo6bar

I'm a laissez fair dumbass. However, I believe (and I could just be venting anger) govt intervention should be accompanied by some legislation or regulation. If these guys are too big to fail, then we should eliminate the big dogs. If leverage was the culprit, manage reserves better. I believe our ultimate undoing was an unusually long period of low interest rates due to mis-pricing of risk. There were too many dollars chasing too few quality investments.

I agree that there should be some legislation or some revisiting of past legislation (see Graham Leach Bliley Act of 1998/1999). But I am glad that they haven't done it yet. Knee jerk legislation is not the answer....a well reasoned (or partially) reasoned solution would be better than something cobbled together over the weekend, like these bailouts.

What is surprising is that for the last 3 weeks, this stuff has happened on the weekend. Why?

[jyl]

Here is another chart. Declines in net worth drive declines in consumer confidence.

Since some part of Regular Joe's net worth is in the financial markets (via 401k if nothing else), that is another link btwn Wall Street and Main Street.

The other part of Joe's net worth is in his house, and we know what's happening there. Following up on RoninLB's post, frozen debt market -> fewer mortgages. Fewer mortgages -> fewer home buyers. Fewer home buyers -> falling housing prices.

On the positive side, falling oil prices have helped consumer confidence a bit. But that help might be fading. I am, personally, no longer betting on falling oil prices.

[jyl]

I agree.

I wish I had some numbers to post, but I don't. I've had a hard time finding an estimate of the losses yet to come on those mortgage-related assets. And we don't know which assets the govt will buy, at what prices, or from whom. But, in general, I think that if done correctly, the ultimate net cost of an RTC-II needn't be stupendous. Big, but not stupendous.

Originally Posted by Rick Lee

I don't think these bailouts will have a net cost of anything close to the amount of money we've been hearing on the news every day. It's not the gov't. just writing a check to wipe away bad debt. They're getting some valuable assets for pennies on the dollar in exchange for the bailout. Some of those assets will be worthless. But still, the vast, vast majority of homeowners are paying their mortgages on time and so those MBS's will retain their value. Theoretically, the gov't. could even turn a profit by all this, though I'd be overjoyed if they just came close to breaking even.

[Shaun @ Tru6]

As a small business with 2 solid years of growth, I was counting on a bank loan this quarter to expand into adults, launch the Joey & Rex book series in January, bring silk screen in-house and hire an office manager.

bank loan is not going to happen and everything has been scaled back to just launching the books.

I don't see the credit market as viable for small companies like mine for at least a year. I'm a tiny small business and can keep going with key help from friends, just won't be able to grow as fast as I would like. From an economy strength standpoint, I worry about the 10 person small company that wants to double its size, increase manufacturing capabilities, etc. I think there are a lot of these companies out there and not having access to capital, they won't grow and our economy won't grow.

[Rick Lee]

Originally Posted by Shaun 84 Targa

As a small business with 2 solid years of growth, I was counting on a bank loan this quarter to expand into adults, launch the Joey & Rex book series in January, bring silk screen in-house and hire an office manager.

bank loan is not going to happen and everything has been scaled back to just launching the books.

Man, that sucks! Can you go SBA? The gov't. seems to like to throw money around. Doesn't SBA just guarantee bank loans though, or do they lend directly?

I think the true cost of the bailout will be tough to nail down until years after it's all over. Some of those assets that are performing great now will come to a screeching halt when certain ARM's reset. If they really do craft a new RTC and it's really devoid of political meddling (fat chance), then this could come out ok. Still, it's a terrible precedent.

[Shaun @ Tru6]

thanks Rick, yeah, it pretty much sucks.

SBA just acts as a guarantor (I sign personally...government pays the bank and then comes after me in case of default), and I talked with my bank (BofA) and they said everything is on hold until 09, the credit market is locked down this quarter.

I think we've got a solid 2 years of slow or no growth ahead of us, and we'll be in a cash economy most of that time.

[Aurel]

How Wall street can affect main street? Seems quite simple to me: no more money to borrow for houses and businesses, sudden loss of all retirement assets held in 401ks, loss of the dollar value and inflation, you name it...

Aurel

[djmcmath]

So given the recent Fed action, is now a good time for Joe to buy a house? Let's assume that Joe's got the capital to put 20% down, show documented income, and plans on paying the same interest rate for 30 years. Should he wait a month or two for the money to really tighten up, or will he then be competing for homes against the same group he's competing against now -- specifically, the people who have the financial wherewithal to get a loan in this environment?

Dan


PS -- yes, in this case, I'm Joe, and I am approved for a loan, and I would really like to get out of the apartment complex ... but I see stuff like this happening, and I wonder if the house prices could get MUCH better in the next several months.

[turbo6bar]

When has any politician or government official underestimated the cost of a program/bailout? $700BN is jthe first wave. Remember these financial companies sold off the best packages of securities and held the dung in house. Look at DSL and FED. They couldn't sell the risky Alt-A garbage, so it stayed in the portfolio. Same story elsewhere. Paulson will be buying the worst of the worst from US and foreign financial institutions.

Dan, a real American would take the 20% down payment and buy one primary residence, one vacation home, and at least 3 additional flip houses. You would stimulate the economy and bring great wealth to your name. If you're not averse to foreclosures, I have seen marked weakness in foreclosure pricing. The banks are starting to get aggressive with pricing. There are definite deals in the foreclosure and retail market. Find one you like. Find one you can live and grow in for a while. Buy it and enjoy. If you're a number's guy, there is not much downside to waiting. Prices surely won't explode upwards overnight.

[RWebb]

Originally Posted by djmcmath

So given the recent Fed action, is now a good time for Joe to buy a house? Let's assume that Joe's got the capital to put 20% down, show documented income, and plans on paying the same interest rate for 30 years. Should he wait a month or two for the money to really tighten up, or will he then be competing for homes against the same group he's competing against now -- specifically, the people who have the financial wherewithal to get a loan in this environment?

Dan


PS -- yes, in this case, I'm Joe, and I am approved for a loan, and I would really like to get out of the apartment complex ... but I see stuff like this happening, and I wonder if the house prices could get MUCH better in the next several months.

probably - but you may not get that 'approved' loan

[RoninLB]

I just bought another house locally. Closing in 2 days.

RE conditions are local.

you have to get a pre-approved letter, good luck.

I had to put 25% down. They wanted 33.3%.

[CRH911S]

I agree that there should be some legislation or some revisiting of past legislation (see Graham Leach Bliley Act of 1998/1999). But I am glad that they haven't done it yet. Knee jerk legislation is not the answer....a well reasoned (or partially) reasoned solution would be better than something cobbled together over the weekend, like these bailouts.

I tend to agree. FWIW, didn't the banking industry recently benefit from new bankruptcy legislation? Isn't what's good for the goose good for the gander anymore?