September 30, 2008
"Wall Street Vs. Main Street" Mantra Misses The Point
The bailout bill is a complicated matter. Both proponents and opponents alike have tried to simplify the discussion by reducing the issue to one-line talking points. A common theme is to frame this in terms of "Wall Street" versus "Main Street."
The characterization masks the real danger. It suggests that the risk of not acting is limited to those who deal with few financial services companies. In reality, the crisis is global in scale, as indicated by this Wall Street Journal piece (quoted by Mish):
The financial crisis makes clear how much the interests of foreign lenders have become a top concern in Washington. A big reason the Fed and Treasury stepped in to rescue mortgage giants Fannie Mae and Freddie Mac, say U.S. financial officials, was to reassure foreign leaders including China, which holds roughly $1 trillion in U.S. debt, that U.S. securities were safe. "Superpowers do not normally ask their diplomats to reassure other nations on questions of credit-worthiness," says former U.S. Treasury Secretary Lawrence Summers.Our entire system of international finance is in peril. If foreign investors lose confidence in the American economy (and dollar) and begin withholding their money, our pain is going to get a lot worse. It's imperative that the federal government act quickly to address this and shore up confidence in our capital markets; otherwise the international community will withdraw support from American institutions and we will fall into a deep recession.
Foreign lenders have a great deal of sway. If they were to dump U.S. government debt -- or be unwilling to buy more -- the interest rates needed to attract buyers of Treasurys would soar. The already fragile U.S. economy would absorb yet another hit.
. . .
Domestically, the reliance on foreign money means a loss of autonomy that Americans are simply going to have to get used to. Part of the accommodation is already occurring. The controversy over investments by sovereign-wealth funds has been reversed. Last year, lawmakers worried the funds would gain political influence by investments in U.S. companies; now U.S. policy makers are worried that they won't buy new stakes. Efforts to erect restrictions against foreign trade may also lose momentum. The U.S. needs the world's money more than it thought it would and won't want to rile potential lenders.