Main Street and Wall Street: The $700 Billion Bailout "Saga"

It is no longer news that the United States Congress has passed the $700 Billion financial sector bailout bill, probably the biggest bailout of the private sector in America. What is noteworthy in the whole episode is the reaction from "Main Street" towards a government bailout of Wall Street Institutions, a reaction so fervent that it most probably led to the first defeat of the bill in the House of Representatives.

There is a tendency for "ordinary folks" and small business owners to dismiss the measures proposed by the Fed and Treasury as nothing more than a bailout of fat cats who ought to be made to suffer for their greed and excessive risk taking. While everybody (including myself) may feel entitled to some feeling of Schadenfraude towards traders who threw all caution to the wind in the urge to deliver record breaking profits and as a result reap obscene bonuses which are beyond the imagination of millions of honest hardworking people. To decide to allow the financial markets collapse in the pursuit of punishing a few thousand traders is tantamount to "cutting off the nose to spite the face" and can only lead to large scale self destruction.

So why should the "ordinary man" care about turbulent financial markets, since they may not even own stocks, not to talk of Collaterised Debt Obligations (CDOs) and other financial "jargons" which have proven to be as opaque and toxic as they sound?. The answer is that the average man should care and he should care a great deal about what is goind on, even though he may not own shares directly the odds are that he may be exposed to the financial markets indirectly either through a mutual fund, a pension plan, his insurance policy etc.

The world's financial markets have grown so interconnected that the phrase "no man is an island unto himself" is probably truer now than ever in global history. People's life insurance policies, college savings plans, mortgages, car loans, credit cards etc are all part of the global financial maze and decisions on Wall Street have real life implications for everyday people. The world has become increasinly dependent on the capacity and ability to securitise all kinds of things from mortgages to car and credit card loans and then trade them in a market. If the securitisation markets dry up completely as it is tending to do, people find that their ability to purchase a house will become severely constrained as mortgage lenders will become severely hampered in their origination efforts due to the absence of a secondary market in which it can sell mortgages to.

Even car ownership will also suffer, automobile manufacturers are very dependent on the ability to finance car purchases by consumers, as most consumers do not pay fully (i.e. 100%) of the car value, hence most manufactures now have fully well developed finance arms, which they have come to depend on in order to boost sales. These finance arms are in turn heavily dependendent on the Asset Backed Securities (ABS) market, in which they repackage the car loans they have originated into securities and sell to investors on wall street, they in tuirn use the proceeds of such sales to originate many more car loans which in turn boosts revenues, corporate profits and job creation efforts. If the ABS markets freeze totally, which might happen if the government bailout doesnt happen, car companies will also be severely constrained in their ability to originate new car loans.

A dearth of new car loans, will lead to a steep reduction in the number of cars sold which will in turn lead to the piling up of unsold inventory. Unsold invesntory coupled with a bleak sales outlook will inevitably lead to plant closures and the attendant loss of jobs by "ordinary people" worlwide who are very dependent on the automobile industry (i.e. auto companies, tyre companies, auto component manufacturers etc). In essence, while the man on the street may feel he has no business being concerned about the markets for "esoteric" ABS instruments on wall street, the truth is that his livelihood and the security of his unionised job (with benefits) may depend on it.

Although I believe that people should not be sheltered from the effects of their own folly, I believe that the government has a greater obligation to maintaining the stability and soundness of the markets than in seeing a couple of wall street execs suffer. I believe the US government should not just throw money at these firms, the government's bailout of the firms should come at a cost to these firms and their excesses should be curtailed and the environment which encouraged the excessive risk taking by these firms needs to be re-examined and rejigged to prevent insurance companies like AIG from acting like highly leveraged hedge funds in the future.

However, in the meantime the US Government should come to the rescue of the Financial Services Sector before it spreads contagion and economic depression to the rest of the world, even though it may seem that Wall Street just got a "get out of jail free" card.