Critics of Congress and the Bush and Obama Administrations want to say that they have favored Wall Street over Main Street with the bank bailouts and loans. The critics have it wrong. The real conflict is favoring Wall Street over Elm Street. Elm Street are the home owners, the workers, the retirees, and all of the other people who have seen their lives, homes, jobs, and retirement dreams destroyed by Wall Street bankers, investment houses, and brokers who gambled with their money and lost. Residents on Elm Street saw trillions spent to help Wall Street, while they were neglected. Now they see the CEOS raking in bonuses and Wall Street making billions, yet little has been done to help them directly.
Three problems directly hurt the residents of Elm Street.
The first problem is an official unemployment rate of 9.7%, with estimates of underemployment hovering at 18%. It is unlikely the 9.7% figure will change much as the economy grows. The reason for this is that all indications are that the recovery might be a jobless one. Companies have improved efficiencies and reduced staff to maintain profits. Unless there is a surprising increase in consumer demand, there is little indication that re-employment will occur in significant numbers. Moreover, as economic capacity increases, new individuals will enter the workforce with the hope of finding work. The result is that high unemployment numbers are probably a feature for the foreseeable future. Finally, because of the high unemployment rate, real wages and income are also unlikely to increase in the near future, again thereby depressing consumer demand.
Elm Street residents are unemployed and if lucky to find a job, are not gaining in income.
The second problem facing Elm Street is the enormous federal budget deficit. The classic Keynesian solution to addressing high unemployment is to stimulate economic demand in the economy. This would necessitate short term deficit spending. However, the bank bailouts and previous stimulus bills have driven the federal deficit to over $1 trillion. Predictions that slow economic growth will persist suggest that mere growth out of the deficit will not occur in the short run. What this means is that the ability of the government to sustain long term deficits without running into dangers of inflation, higher bond rates (to encourage investors to purchase USA debt), or downgraded credit ratings (as just happened with Greece and Portugal) is in doubt. There is a need to reduce the debt, but that also runs the risk of hurting economic growth before the economy is sustainable.
Residents on Elm Street know the debt is unsustainable and worry that they are being asked to pick up the price to stimulate an economy not working for their benefit.
The third problem on Elm Street remains the depressed mortgage and real estate markets. The main reason for the economy tanking in 2008 was the collapse of the real estate mortgage market. Perhaps this collapse is the result of the bursting of the housing bubble, subprime mortgage speculation, or fraud and risky financing by Goldman Sachs and other companies. But whatever the reason, when the housing market crashed so did housing prices. Home owners lost trillions in home equity, and it also threw many into default, including the banks and other institutions that financed or collateralized the mortgages.
Residents on Elm Street are losing their homes.
Over the last two years residents on Elm Street have been ignored, and that is why they are angry, manifesting that ire in Tea parties and anti-incumbent fever. As I have argued consistently for the last two years, the biggest mistake of the Bush and Obama administrations was to bail out the banks and not directly seek to prop up the residential housing market. We would have been far better off spending the first $150 billion stimulus in 2008 on helping home owners than in giving general rebate checks that did little to help the economy. Similarly, the $700 TARP should have been directed towards halting foreclosures as opposed to bailing out banks. The bank bailout rewarded those who caused the problems and it did not correct the underlying economic problems driving the bank failures. During the second 2008 presidential debate in October, McCain almost understood this when he suggested that TARP should have been spent to keep owners in their homes. This was the right answer but McCain never returned to this theme. Finally, some of the Obama stimulus bill in 2009 should have also been directed towards helping homeowners.
Think about a twofold policy that should have been adopted. First, I would have taken an idea that Hilary Clinton proposed during the 2008 campaign–adopt a 90 day moratorium on home foreclosures–and extended it to one year. We are better off keeping people in their homes, making sure that more houses are not dumped on the market, further depressing prices. Second, I would have taken the TARP money to help rewrite many loans so that they would be at lower interest rates. In fact, the government should have directly subsidized many of the loans to reduce them to zero or near zero interest. If the Federal Reserve Bank can loan money to banks at near zero interest it should also do the same for homeowners. Reducing the rates would have helped many owners stay in their homes. But TARP and other money could have also been used to help refinance homes whose value had fallen. In cases it makes sense to do the refinancing, others not, but again this refinancing would have helped stabilize the housing market, thereby also addressing some of the underlying losses banks are now facing.
My point in discussing the above is that helping Wall and not Elm Street was the road not taken. It was helping Wall Street and abandoning not so much Main Street as it was Elm Street. The government simply directed its resources in the wrong direction and while Wall Street is happy, residents on Elm Street are not.
Moving forward, the task for Congress and the president is more than simply regulating banks. Yes this is needed. But it is also doing something significant for Elm Street. It is not too late to address foreclosures, unemployment, and the huge federal debt. But to do that may mean asking the residents on Wall Street to pay for the damage they did to those living on Elm Street.