Software Nerd

Saturday, October 04, 2008

Main Street vs. Wall Street (Part 2): Illustrated :)

In a previous post, I said that "Main Street vs. Wall Street" is an incorrect way to think of our current financial problems.

The issue is not money, not the $700 billion... but something more fundamental: the role of government. This might be a turning point (hopefully temporary) where the U.S. goes through a phase of relatively-increased class-warfare and (resulting) government control.

To understand the money involved, contrast this bail-out to the recent "stimulus checks". If I remember right, that was a government outflow of $150 billion. In contrast, the "bailout" is an outflow of $700 billion, of which much will flow back when the paper is sold. Even if we assume that the $700 will become $1 trillion; there's a good chance that a large chunk of that will be repaid by the mortgage holders. It all depends on the prices at which the government buys the paper, but it's pretty reasonable to assume that the net outflow will not be much more than $200 - $300 billion. (Even Paulson's assertion that there may be zero net outflows is not total hogwash.)

Yet, there is such a ruckus about the bailout, while many people I know ("Main Street" folk) were glad to get the stimulus checks. Why? Because it is not the amount, it is about the perceived unfairness. This perception is creating an environment where voters are more disposed toward socking it to the rich. This structural change has more serious consequences than the bailout itself.

Here's an illustration: On the left is Wall Street, consisting of good guys and bad guys. On the right is Main Street, with both good and bad. In both places, there is more good than bad (the illustration does not do that enough justice).

Using this map, the politicians want the battle to be fought left to right (Wall Street vs. Main Street). The real battle ought to be fought top to bottom. If the responsible home owners and borrowers and the responsible bankers team up, they do not have to subsidize the irresponsible.

The politician fears that: they will not need him any more. instead, he looks at this and sees lots of money on the left and lots of votes on the right. So, that is the battle that he promotes, because only he has the legal power to take that money from the left and hand it over for votes on the right.

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