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A modified version of the rejected package, containing additional tax breaks and other incentives to satisfy members of Congress, passed in the U.S. Senate on Sept. 30. The House of Representatives reconsidered the modified bill and passed it on Oct. 3. The Bush administration, Congress, Wall Street and the common man on the street all heaved a sigh of relief.
To pressure the reluctant House of Representatives, Wall Street had another trick up its sleeve. It locked down the credit market and inflicted difficulties on “Main Street” in order to save itself. This could have resulted in people not receiving their paychecks, small business owners unable to stock and restock, credit card holders unable to buy gas or food, needy people unable to buy a car or get a home mortgage, and so on. It was all very cleverly played out over four days starting from Sept. 29, in an attempt to persuade the reluctant legislators to budge.
People on Main Street have made the argument that Wall Street created this situation and so it should be the one to suffer, not ordinary people. The truth of the matter is that Wall Street operators knew about the risks to some extent and decided to insulate themselves by making Main Street dependent on them. Sub-prime housing loans are one example. Wall Street knew the risks of sub-prime loans, yet proceeded with loan disbursement, and for a few days held Main Street for ransom.
How did Wall Street achieve such phenomenal power? It all goes back to the huge amount of sub-prime mortgages handed down over the past decade and more specifically in the last four years. Thanks to exporting countries, there was too much money at the disposal of Wall Street, which handed it down as short-term low-rate mortgages.
These mortgages were repackaged as mortgage-based securities and sold profitably to banks under the assumption that housing prices would go up, thus causing the stock market and workers’ wages to go up as well. Banks held these securities, albeit as mortgages, as assets on their balance sheets.
When the housing boom ended in 2007 and people could not afford the mortgages, these assets became liabilities. First, the investment banks failed, then the mortgage companies of Fannie Mae and Freddie Mac failed and finally the risk insurance company AIG failed. Banks were expected to go next, until they decided to ask for help. Their argument was that if the government appeared reluctant, they would lock down the credit market. That was the beginning of the week of Sept. 29.
Why should Main Street suffer for this? It should be spared, having no role in causing the credit crisis. Rather, it is Wall Street that should be held responsible. Let a few more companies line up for bankruptcy. They should realize that they have to pay the price for their own excesses. Going out of business or being sold at a fraction of the price would be a good punishment. A few of the more aggressive operators lining up at soup kitchens would also be a good sight. These would serve as lessons to others.
Today, a few thousand Wall Street operators may be out of a job. That is a drop in the bucket compared to the millions of innocent people they are going to put through the ringer.
The so-called rescue plan of US$700 billion, plus $100 billion in tax breaks, has been packaged as attractive legislation on behalf of Wall Street and the banks. On the other hand, the 2.8 million homeowners whose mortgages have been foreclosed have had no help for the past two years. This has resulted in intense anger on Main Street, which is why legislators were reluctant to pass the bailout package.
The time has come to reform Wall Street. The Wall Street that has existed since the Great Depression 80 years ago has ceased to exist. In just two months, Wall Street’s “irrational exuberance,” to quote former Federal Reserve Chairman Alan Greenspan, has vanished. Hedge fund owners have borne the brunt of this financial meltdown. Ordinary people’s retirement savings in the form of 401Ks have been halved. To some extent, all of this could have been avoided if there was legislative or executive oversight of Wall Street.
Successive Republican administrations over the past 25 years have gutted control measures one by one. In addition, highly complex financial instruments like derivatives and hedge funds – options, which dominate the speculative market – have no control mechanism. Sooner or later, something was bound to go wrong, and it did in 2007-08.
Once again, reforms on Wall Street should begin with pink slips to the top operators. Their Ivy League degrees should be handed back to them with a return taxi fare as their golden parachute. New operators must provide ironclad guarantees of sticking to the new code of conduct.
With one month until national U.S. elections, the U.S. political scene has become murky amid this financial crisis. Regarding this present crisis, the word “change” is no longer the buzzword of the Barrack Obama campaign. The presidential candidate failed to capture the mood of the people. Under pressure from his opponent he signed on to the bailout package, without foreseeing the intense anger now sweeping Main Street against the bailout. Even his favorite black caucus in the House of Representatives abandoned him. Although they initially voted against the bailout, at a later vote, some of the black caucus members relented.
John McCain’s campaign has suffered a series of reverses. Main Street believes that the Bush administration is responsible for this economic crisis, with many identifying McCain directly with George W. Bush. His presidential debate performance was not spectacular and his vice presidential pick of Sarah Palin has become a celebrity comedy show, thanks to her lackluster interviews.
Things are tough not only for McCain, but for all Republicans who are up for election to Congress. This financial crisis may sweep them aside for a long time. It is not hard to imagine a good Democratic majority in both houses as compared to the razor-thin majority now. This will be one political bonus for the Democrats.
President Bush, although hard at work as a lame duck president, has presided over the worst crises of this century. His legacy will be permanently tarnished due to the Iraq war and this financial crisis.
With or without the bailout package, it is time to restructure Wall Street. It should never be allowed to repeat the excesses of the last decade. The party that promises greater reforms will win the upcoming elections in a big way.
The root cause of the problem is an uncontrolled Wall Street, and that is also where the solution lies. In addition, a more fundamental issue needs to be addressed, that is, how to prevent exporting countries’ money from entering the money market. Extra cash creates problems. Trade needs to be balanced both ways, which will limit the availability of huge amounts of extra cash.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
