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The new stimulus package of US$787 billion from President Barack Obama to Main Street is not sitting well with Wall Street, which wants all the money. Both Wall Street and the banks are hell-bent on sabotaging Obama’s recovery plan. The banks can ease the credit crunch only if all US$2 trillion in toxic assets are removed from their books and taxpayers are made responsible for their past 10 years of stupidity.
The manufacturing sector, the carmakers, got their bailout package but still blame the credit crunch for their woes instead of their own bad management policies and operations. They still want more money. Elsewhere, states and cities in the United States eagerly await the release of money from Obama’s stimulus package, which they believe will create jobs and jobs will pay taxes, which will ensure their viability.
The newly released plan for the second installment of the bank bailout package, passed on Sept. 29 last year, has been termed as vague. The banks want the money on a silver platter without questions being asked and will try and sabotage Obama’s recovery plan. On both counts it is the stock market that will be forced into retreat. As a result, Main Street will suffer.
Wall Street is a collective name for the stock exchanges, investment houses, brokerages, big banks, big businesses, rating agencies and other movers and shakers of the money supply. Money is derived from every economic activity in the world. A similar infrastructure exists in almost all countries.
Wall Street was set up to raise money for industrial and other economic activities in the United States. JP Morgan was its first mover and shaker in the early 20th century. At that time business magnates exchanged shares, acquired companies, borrowed money and used third parties – brokers – to do the work for them. Banks always acted as a conduit between savers and borrowers and operated under strict government guidelines.
These guidelines over the last 50 years were gutted, which freed the capital market of any oversight. At that time these so-called reforms were heralded as great financial freedoms. Today we know them as the principal cause of the financial meltdown.
The U.S. government with its elected branches is the most powerful system of governance. In economic matters it operates through its Treasury Department and Federal Reserve, which are specifically designed to manage the government’s money and the overall economy.
The Treasury head is a member of the president’s Cabinet while the Federal Reserve chairman is an independent manager of the money supply and also head of 12 federal district banks. These district banks also provide services to the U.S. government in managing the country’s payment system. For the last 50 years it has maintained stability in the market.
These innocuous activities of the Federal Reserve make it appear as a subservient branch of the more powerful executive and legislative branches. On the other hand the Federal Reserve chairman performs the most important task, which touches the lives of every American citizen.
With globalization the Federal Reserve has a global reach. The United States itself did not realize its importance until the second half of last century. Since then every word uttered by the Federal Reserve chairman has been carefully watched.
The Federal Reserve chairman is probably the most powerful unelected official in the world. His appointment is very carefully watched. His political leanings can make and break presidents. Arthur Burns, the 10th chairman of the Federal Reserve, during former U.S. President Richard Nixon’s reelection campaign in 1972 expanded the money supply and made the economy feel better. It was a deception that got Nixon reelected.
In recent times, former Federal Reserve Chairman Allan Greenspan’s era from 1987 till 2007 is most remembered. He is credited for pulling the nation out of recession twice, 1992-94 and 2001-02. However, he is also partly responsible for the current economic troubles. He expanded the money supply and caused a liquidity glut, which invited crooks to take advantage of it with subprime mortgages.
Businesses do not necessarily obtain money from banks. In the last 30 years, with complex trade, money has been obtained from financial houses on Wall Street.
Forty years ago junk bonds were popular. Now, convertible debentures and collateral debt obligations and other derivatives are offered by finance companies that make going to banks for big bucks unnecessary. Businesses go to banks mostly for working capital. Small businesses go to venture capitalists, hedge fund managers or a commercial bank to get their needed finance. All this has made Wall Street more important than banks.
An average person in need of money had only one source, the bank, until 15 years ago. Today, with relaxed rules, the same person can obtain his mortgage from a local broker or buy his car through a private finance company. Brokers group these mortgages and other loans and trade them on Wall Street as securities and sell them back to the banks.
Borrowers who otherwise would have been turned down by banks obtain their subprime mortgages from such brokers, who ask for little or no guarantee or additional security. These loans are guaranteed through federal mortgage agencies like Fannie and Freddie, which worked well until housing prices began to fall.
This system of finance stayed below government regulations, which were minimal anyway. Most of the time the Federal Reserve played “catch-up,” making the Federal Reserve chairman powerless to do anything in the last 10 years. He remained the principal money manager of the U.S. government, setting interest rates and controlling the money supply only.
In economic matters, the elected U.S. government does not take initiative. Rather, the appointed Federal Reserve chairman holds sway. As a matter of policy, finance, commerce, trade and other economic matters are left alone without any interference from politicians. This is the U.S. mantra preached around the world.
Today’s financial meltdown would not have made news till house prices began to fall in early 2006-07. A large number of subprime mortgage holders began to default. They were overloaded with debt.
By September last year their numbers exceeded 2 million. These mortgages were foreclosed and banks that had purchased the mortgage-based securities earlier became proud owners of millions of worthless homes. That is when an alarm bell rang.
Wall Street asked for urgent help from the government, which could not be refused as the situation threatened the collapse of the banking system worldwide. The government blinked and decided to hand over US$700 billion to Wall Street, with more to come.
Had these Wall Street operators kept things in check initially, the collapse would not have happened or if it did, it would have been less severe.
In summary, if one stacks up all the cards, Wall Street seems to wield more power and influence than the government. Technically the government, through its Treasury secretary and Federal Reserve chairman, should be the center of economic power. But they are left behind and forced to play catch up. It is Wall Street that is more powerful.
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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.)
