The Main Street - Wall Street Bout, Round Two 35 comments
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Get your boxing gloves on because the fight is ON! It is Main Street vs. Wall Street and in the latest round, Main Street has won. Despite the protests and tens of thousands of letters, emails and phone calls to their Senators, Main Street needs to realize that there are no winners if Wall Street fails. This is a slippery slope and if Wall Street loses its footing, everyone else could fall as well. This is not to say that I don’t agree that bankers need to be punished for their extravagant risk appetites, but it is time to start thinking about the consequences for the average American.
Overnight LIBOR rates, which is the rate at which banks lend to each other hit an all-time high of 6.88 percent. This is 488bp higher than the 2% Fed funds rate. The 3 month LIBOR rate is also above 4 percent. Since many home equity loans, lines of credit, student loans, small business loans and credit card rates uses LIBOR as an index, the rise in borrowing costs will be felt on Main Street. The reason why the borrowing cost or LIBOR has surged is because banks are not willing to lend money. With the bailout plan in flux, cash is one of the most valuable commodities.
Here’s how Main Street will feel the pain if Wall Street doesn’t recover:
1. Evaporating Equity Market Wealth: $1 Trillion in market capitalization was wiped out from the stock market yesterday. For the average American who still has money in equities or has a 401k, the pain was certainly felt. Year to date, the Dow Jones Industrial Average is down 19 percent.
2. Higher Mortgage Rates: There aren’t that many mortgage lenders left in the market. Take a look at the rates that Wells Fargo is charging. On a 30 year fixed mortgage, they are charging 6% for conforming loans and a whopping 9% for jumbo loans. Home equity lines are being pulled by lenders left and right as they try to shore up their own balance sheets and reduce risks.
3. Larger Job Losses: In addition to all of the companies that have already gone belly up, we are in an environment where it is difficult for corporations on and off Wall Street to borrow or raise cash. As a result, they will start cutting back which means layoffs, hiring and project freezes. These ripples will be felt by Americans either in the form of a direct job loss, smaller raises and bonuses.
4. Lower Credit Card Limits: As if the problems in the labor market, higher mortgage rates and evaporating stock market wealth is not enough, the limits on credit cards are also being lowered. All of this translates into weaker consumer spending.
5. Weaker Housing Market: Housing market and stock market wealth are the single biggest assets for Americans. Tighter terms of credit, pulled home equity lines and a weaker economy will make it difficult for Americans to buy and sell homes. There is still a lot of inventory set to come onto the market over next 12 months. Here in NYC alone, construction projects are still underway. The problems on Wall Street means that the projects will either be frozen, prices will have to come down or inventory will end up sitting on the market for a longer period of time.
Main Street’s Biggest Argument
The biggest argument against the bailout is the cost to the US taxpayer who will end up shouldering the burden for years to come. This is a legitimate issue but unless Americans want to fall into a prolonged recession, Wall Street needs to be stabilized so that banks feel confident enough to stop sitting on their cash and start lending.
What About Invigorating Main Street Directly?
Directing more money into public works projects could certainly help Main Street by creating more jobs. Extending unemployment benefits will also make it easier for out of work Americans, but what Main Street really needs to realize is that the problem on Wall Street is confidence.
The compromise that is being floated around today is to reissue the bailout plan with higher FDIC insurance for all Americans. Lawmakers are proposing to hike the FDIC insurance from $100,000 to $250,000. Everyone wants some sort of deal to be done and this bribe to Main Street is brilliant because it offers them a jolt of confidence without having to realistically commit any additional money. Like health or life insurance, it is there for the peace of mind.
The 3 big banks that are left on Wall Street - Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C) will still be here when the dust settles. The following chart illustrates the distribution of deposits amongst the biggest commercial banks in American. According to the data, the Big 3 hold 75 percent of all US deposits and including Wells Fargo (WFC), that is close to 90 percent. So even if everyone but the top 3 commercial banks fail, the FDIC only has to fork up a limited amount of money.
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This article has 35 comments:
this is not about main street vs wall street but keeping the life line of USA - credit
The market will right itself with or without a bailout, but how long do we want to drag it out?
The one thing I don't get is how liquidity can be maintained during the deleveraging process. I mean, if the whole point to deleveraging is to reduce the debt that has been multiplied 25-30 times, instead of the safer 10-12 times, then wouldn't that mean that there must therefore be less "money" to lend out, and since there was already more than 10-12 times debt out there, that means that by definition, to unwind the financial market problems, liquidity will naturally be restrained, resulting in higher rates to those who get it (which we are seeing), and a higher requirement for payback (which we are seeing)? In other words, how does liquidity get "maintained" without leaving us in the same situation we are in now?
Here is Main Street’s reply:
1. Evaporating Equity Market Wealth: $1 Trillion in market capitalization was wiped out from the stock market yesterday
And yet the P/E ratio is still too high. The losses are yet to be seen in industry, stock prices are going down until the profits earned justify the prices paid. Throwing good money after bad isn’t an optimal solution for the Main Streeters who are trying to build a retirement fund. Blindly adding to the national debt to keep money losing businesses afloat doesn’t seem prudent either.
2. Higher Mortgage Rates: There aren’t that many mortgage lenders left in the market. Take a look at the rates that Wells Fargo is charging. On a 30 year fixed mortgage, they are charging 6% for conforming loans and a whopping 9% for jumbo loans.
And prices are still far too high for Main Street to afford a decent home. My first home mortgage was at 11.25%, but the price was still such that I could afford payments without selling my soul to the bank.
3. Larger Job Losses: In addition to all of the companies that have already gone belly up, we are in an environment where it is difficult for corporations on and off Wall Street to borrow or raise cash. As a result, they will start cutting back which means layoffs, hiring and project freezes. These ripples will be felt by Americans either in the form of a direct job loss, smaller raises and bonuses.
This I have difficulty understanding. If a company is doing good business on Main Street they don’t have to borrow. Profits fund operations. If Wall Street businesses can’t compete without borrowing huge sums to stay open they should fold up the tent and go home. Maybe they can get a job on Main Street. As for Main Street, I haven’t ever gotten more than a $50 bonus for Christmas. I can get by without it if I have to.
4. Lower Credit Card Limits: As if the problems in the labor market, higher mortgage rates and evaporating stock market wealth is not enough, the limits on credit cards are also being lowered. All of this translates into weaker consumer spending.
Living beyond your means via credit cards is a big part of what got us into this mess in the first place. Most on Main Street live within their means and if not they will learn to do so the hard way.
5. Weaker Housing Market: Housing market and stock market wealth are the single biggest assets for Americans. Tighter terms of credit, pulled home equity lines and a weaker economy will make it difficult for Americans to buy and sell homes. There is still a lot of inventory set to come onto the market over next 12 months. Here in NYC alone, construction projects are still underway. The problems on Wall Street means that the projects will either be frozen, prices will have to come down or inventory will end up sitting on the market for a longer period of time.
Here on Main Street nobody can afford to buy a house. If the prices come down maybe we can.
Main Street’s best argument is to stop paying Wall Street too much money for making a debt burdened mess of big business.
Learn to adjust.
clerk.house.gov/evs/20... <------ how your congressman voted on the bill
We've got some work to do to make sure that Socialism does not trump Capitalism in our government come the planned re-vote on Thursday/Friday
... Main Street needs to realize that there are no winners if Wall Street fails. This is a slippery slope and if Wall Street loses its footing, everyone else could fall as well. This is not to say that I don’t agree that bankers need to be punished for their extravagant risk appetites...
So shall we punish them by letting them keep their ill gotten gains at the expense of the taxpayer? You are correct that capitalism needs capital markets, and functions best with some form of bank as capital markets. However, why does it have to be the current banks? Their expertise? LOL It is their lack of expertise, their lack of fiduciary responsibility, that put us in this mess. Ultimately, I put the blame on Congress because they allowed themselves to be rendered ineffective, sold themselves out, but the banks deliberately, knowing the ultimate consequences, acted in a rash manner. So what do I propose instead? Take all the current large banks and break them up, sell the pieces to the next tier. That second tier can hardly do worse, and the failed bureaucratic systems will be broken up.
That won't happen for two reasons.
First, because of our primitive currency/money regime the federal reserve, and thus us, depends on these banks to inject money into the system. It isn't hard to figure out who designed this system, is it? Right on the first try, the banking interests!
Second, the losses that would have to be recognized are mostly in the portfolios of our creditors. We have become a debtor nation. Without those creditors lending us money, we would have to cut back on spending (think Argentina). You might think that the creditors would want to see this happen. You would be wrong. They have structured their economies to depend on our profligacy. It is all a house of cards, and all the parties to it want to see it stay standing. That is why the threat is couched as "The bogeyman will get you!" instead of being spelled out. You can imagine how a politician views going back to their voters and saying "We have to take away some of your something for nothing giveaways, we were lying to you." Those representatives that voted against the bailout are very courageous.
As Clueless Wonder said above, the bailout can't fix this problem. It is a bandaid to hope that a miracle will occur to keep the house of cards standing. A bunch of con artists/financial operators convinced the suckers they were dealing with they could make gold out of lead. And they seemed to be able to. When they were done with securitization and credit default swaps, it seemed like they had created AAA debt out of subprime mortgages. When they left, they took some of the true AAA debt as payment and converted it to real wealth for themselves. The trouble with their alchemy is that it had limited lifetime before the gold reverted back into lead. So we have trillions of dollars of AAA debt that is now back to subprime. It was illusion, and the illusion has been exposed. There isn't any true wealth there, it was all smoke and mirrors. The losses are real, though, and someone is going to have to pay.
The bailout won't change the reality of this. We have two choices. Recognize that we were taken for a ride by financial operators, take our lumps, and move forward with a corrected system that won't let it happen again, maybe punishing the perpetrators in passing. Or inflate the crap out of the currency, so the debt that evaporated becomes less and less significant with time until it can be swept under the rug. The bailout is part of the second solution.
Who gets hurt by massive inflation? Main street. Why? Because of the way our system is designed, banks get the money before it is devalued by inflation. So they can spend it at the old rate. Main street gets it after it is devalued, so they pay the banks. People who save and aren't reckless are hurt because their assets are devalued in favor of bankers. I know, life isn't fair, and the powerful do unto the weak, but this seems a little too much.
When housing prices started to fall, Joe didn't want to lose face and sell at a loss, so he kept the house and started being delinquent on the mortgage payments. Inevitably, the bank had to repossess the house, but not before our hero Joe decided to get back at the evil bank and trashed the place, reducing the resell value even further. The bank wasn't the main victim; banks don't keep most of the mortgages on their books. It was the general investing public who paid the price for Joe's recklessness and vandalism.
Now Joe Sixpack, who started this whole fiasco, is sitting in his trailer, avoiding the credit card collection guys, and protesting this "Wall Street Bailout Package". Why should he pay for the losses? After all, he weaseled out of his debts fair and square.
seekingalpha.com/artic...
Practically everyone, except Owen, lays out clear reasons why the bailout is the wrong thing to do.
Owen thinks we are all stupid rubes out here in the unwashed masses and it's all our fault, so he should be given free taxpayer money so that the party can continue. Well Owen, had Wall Street maintained risk management standards, the J6P's who didn't deserve loans would never have gotten them, would they? And why didn't Wall Street maintain risk standards? BECAUSE THERE WAS TOO MUCH MONEY TO BE MADE, AND BECAUSE MONEY WAS MADE AVAILABLE TOO CHEAPLY BY EASY MONEY POLICIES AT THE FED. None of these things are even within the influence of J6P, are they?
Government intervention into the markets will recreate the Great Depression, and complete the destruction of the dollar in the process. GD1 would have ended much more quickly had the government not intervened against market forces and in so doing extended the crisis, while greatly expanding government power in the process.
Let market forces work. If government officials were smart enough to manage an economy, how did we get here in the first place? Only an idiot would trust these same people to manage our way out of this mess.
The market correcting itself is the best thing that can happen to American lower and middle income earners. They're the ones getting destroyed by the artificially inflated housing prices resulting from a bubble created by the financial community. After the correction, people making $30K might be able to actually afford a home! This is not the end of the world.
Or will Congress and Paulson look at some new ideas?
1) This is almost a hand out / blank check to Wall St. None of this does anything to alleviate the pain and misery of Main St.
2) The Bush administration has strongly denied any concessions for directly helping the troubled home owners.
3) This plan will do nothing to cure the underlying problems.
All these members are asking why isn't such a huge bailout designed to work directly with consumers, and why are we not considering other alternatives.
Even if there is an injection of liquidity in the markets, if Main St. is already saddled with a huge debt that it cannot already pay off, where is the market for Wall St. to lend more money. At current home prices, I still dont believe there are buyers for loans.
Zai
You make some valid points. Note, however, that I never accused anyone of being a 'stupid rube', as you claim. All participants in this fiasco were reckless and greedy, and it's only our amazingly lenient personal bankruptcy laws that allow irresponsible borrowers and soccer-mom-real-estate... to welch on their commitments, and leave Wall Street holding the bag and having to pay the bill. Blaming the banks is like blaming the bookie for accepting an IOW from a penniless gambler.
I don't want any money from taxpayers. I want to see a national list of those who tricked their bank into lending them money based on false statements, and make sure none of them have access to a loan again unless they can secure it with hard assets. Financially unsound borrowers should all get the same treatment, whether they are an insurance company or an unemployed bum.
What kind of business borrows money at 2% and then risks it on loans to unqualified buyers for a 4% spread on the interest rates?
The kind that goes bankrupt eventually.
But we have to stop treating the borrowers as the victim here. It is not the barman's responsibility to tell you that you've had too much to drink, and it's not your loan officer's job to tell you that your real estate speculation is dangerous. It is time for those who started this ordeal by buying into a real estate bubble using other people's money to take responsibility for their actions, and stop pointing fingers at everyone else.
Poor Richard's Almanac
Mad Magazine
Smarty_Pants, I love your posts. Keep'em coming!
Yes, average Americans generally understand that not providing a bailout will cause immediate problems, but frankly average Americans have not benefitted much from the economic forces of the last three decades.
The revolt, although somewhat knee-jerk and unconscious, is really about the widening wealth gap in America and until the US government wants to acknowledge that the middle-class has been getting screwed while Wall St. elites have been reaping rewards, we will fundamentally go no where.
An agreement must be reached that "insures" the risk at hand and companies who made dumb decisions should pay an appropriate premium for that insurance... otherwise they should go bankrupt with the consumers who made bad decisions borrowing what they did.
We have got to quick rewarding bad decisions!
nice rebuttal. agree with all.
My second mtg in 1981 was 16.75%. now that's rough.
Owen & Joe Sixpack: fiscal responsibility is required on both sides of a contract. The borrower may have been relying on appreciation. The lender on playing hot potato with CDO's. Both are now getting burned.
Yes, people who took loans they could not pay back should not get any more loans, I agree.
There is also something called "fiduciary responsibility" where one who handles others' money is supposed to make prudent decisions regarding its use. There are NO circumstances under which loaning a half a million dollars to someone to buy a home at 100% LTV, without verifying their income and running a credit report, can be seen as responsible. The people who made these loans should not be allowed to handle any more money either. They certainly should not be handed $700 Billion of taxpayer money. Nor should the people who took those loans, melded then sliced them into tranches and said 75% were really AAA, and then sold them off and kept the commish.
How many of main street folk have 250k in their accounts sitting there at the banks? Dont you think it is likely these are the same folk whose investments are being bailed out. I think this is all about revenge and payback and the smart minds are under seige and cannot see the facts . We have to save the middle class they are the ones most vulnerable not the T Boone Pickens types who can lose a few hundred million bucks and still smile. This is a middle class rescue. Look at it!!!
The bailout/rescue plan needs to take steps to protect honest Americans and at the same time ensure that those who did not meet their obligations can never again get a loan! Regulation is needed to set lending standards. I don't want to hear in the future that some poor person, or population segment, is not able to achieve the American dream. They've proved they don't deserve it by not repaying their loans and now the rest of us are paying the price!
Call it what it is!
Too many good insiteful comments to compliment, but the reason many of those with fudiciary responsibility abdicated it was due to preasure from the congress to increase home ownership for minorities. So why dont we use the congress's personal fortunes to fund the $700 B?
There are a FEW less mortgage lenders out there, but anyone with good credit that can prove income can qualify appropriately.
The reason for 9% jumbos is 2 fold: 1, the max amout is now 725k for conforming, and 2, the market for jumbos has dried up due to the large number of liar loans previously made here.
You need to do more research and less chicken little.
Good, qualified borrowers can borrow all day - the rules have not changed for conforming loans. It is only the marginal loans - which created the lion's share of this mess - that are more difficult to find.
top 50% of earners pay 97% of income tax; top 25% pay 86%, top 10% pay 68%, top 5% pay 60%, top 1% pay 40% while the bottom 50% of earners pay only 3% of taxes (yet make up 12% of income earned). Regressive taxes my aunt tillie!
top 1% make (what) and pay 40%.
would you have the bottom 50% pay 50% of their income??