Connecting the Dots

Main Street, Wall Street are Linked

All in favor of bailing out the rich, greedy, corrupt barons of Wall Street vote ay! All those in favor of ignoring the plight of the middle class on Main Street as they watch their investment portfolios shrink, have a much more difficult time procuring credit, and are becoming at an ever higher risk of losing their jobs, homes and dreams of college education for their children, vote nay!

It is unfortunate the debate this week in Congress was boiled down to some kind of perceived war between Wall Street and Main Street. It was politics, as usual, at its finest. The truth is that Main Street and Wall Street are inexorably tied together. The consumer that shops on Main Street, or El Paseo, or Indio Boulevard, are spending their hard earned money on goods and services that are provided by a variety of businesses. Those businesses are generally financed by banks, both large and small, which in turn are financed and supported by other banks, which are supported by debt instruments issued on Wall Street.

The credit markets on Wall Street have frozen or are failing. They are failing because the investors in those credit instruments, many of whom are foreign entities and governments, have lost all confidence in the asset values that support the debt. And, it is for good reason. The world has taken a bath on mortgage related assets. They have lost complete confidence in our financial system. As a consequence, banks without liquidity or a source of funding have stopped lending to each other and to borrowers.

So, what does this mean to you? It means that credit or loans are going to remain difficult to get. In fact, they are going to be significantly more difficult to get. And, consumers that are deprived from this debt will slow down consumption of goods and services. This, in turn, means decreasing revenues of the companies that produce or sell those goods will force those companies to cut expenses and staff. Unemployment will continue to rise at the same time access to credit continues to contract.

Using a larger example, General Electric, the company that brings good things to life, has to roll over $80 billion in debt over the next few months. If the credit markets continue to not function, GE will be faced with some difficult choices, which most certainly will include significant layoffs. Small and large corporations are all facing the challenge of renewing or procuring debt in order to continue or grow business operations.

In the Coachella Valley, our economy has been hit significantly by the downturn in real estate. We are now beginning to feel the next big impact to the economy, which is the decline in tourism dollars. While still a destination that can be commuted to by millions, revenue in hotels, casinos, restaurants and other related services will continue to be impacted by a lack of confidence and cash in the market.

The bill defeated by Congress earlier this week does not fix all of the nations economic woes. It doesn’t even come close. As odious as intervention is to many of us, it would have offered some very necessary stabilization to the credit and real estate markets. Specifically, it would have provided a floor to wildly depreciating real estate values and removed the incentives for banks and investment banks to continue dumping the real estate at fire sale values.

The truth is that the bill considered and defeated by Congress was not a bailout of rich fat cats on Wall Street. They already have a lot of money. They will keep a lot of money no matter what bill is passed. They generally don’t have to worry about the bank dumping the home next door for 50 cents on the dollar and, thereby, depressing the value of their home.

The bill was a bailout for all of us. Its attempt was to restore confidence in the financial markets, which we all need, and to avoid a significant recession and potentially staggering unemployment. At the heart of this bill was Main Street not Wall Street. I admire the Representatives who had the courage to support doing the right thing even though it was clearly unpopular with their constituents. There is a time when pride and anger needs to give way for prudence and necessary action.