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We don't agree on how much of an impact their failure will have on our overall economy. http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=103&topic_id=389644&mesg_id=389644The meltdown of Wall Street and the resulting government intervention are real and will reshape the industry. But it's much less apparent what the ramifications are beyond the financial industry. The link between Main Street and Wall Street has always been mysterious. There have been Wall Street crises that barely touched the broader economy (think the Panic of 1907 and the implosion of Long Term Capital Management in 1998), and there have been Main Street downturns that have only marginally hurt Wall Street (the 1981-82 recession). Many people say that today's crisis on Wall Street will have dire effects on the "real" economy, but for now, at least, those assertions are just that. The U.S. economy, at least as measured by GDP, has shown surprising growth through the first six months of the year, up 3.3 percent in the second quarter alone. Consumer spending has flattened but not collapsed under the weight of higher gas and food prices and tighter credit. Stocks are down, but in the last presidential election year of 2004, the only real gains in the market happened between late October and the end of the year. On Main Street, there may not be much to celebrate, but it's a far cry from what's happening on Wall Street.
And it's not even happening everywhere on Wall Street. Trillion-dollar asset-management companies such as Fidelity and Vanguard, for instance, are doing fine, though the decline in stock prices is a negative for them. Companies that make money processing transactions, ranging from massive banks like State Street and Bank of New York, haven't imploded. Credit-card companies like Capital One, and Visa (which had one of the most successful initial public offerings in years earlier this summer) have not seen the consumer defaults that the dire rhetoric would suggest. In free-fall are investment banks and anyone involved in mortgages and their many derivatives, but parts of Wall Street are business as normal, though you'd never know that judging from the mood. After all, Bank of America—flush with consumer deposits from Main Street—actually had $50 billion to buy Merrill Lynch.
Even the absolute size of the problems isn't as dire as depicted. Lehman Brothers just before it went bankrupt had a market value of $2.9 billion and about 25,000 employees. Most of its value is now wiped out, though 10,000 of those workers will find new jobs at Barclays. But even at its height, it was far smaller than hundreds of companies that get less press. Take a company called Polycom, which makes teleconferencing equipment; you've probably seen their triangle-shaped units in some office or another. It had a market value of about $2.4 billion. If Polycom were, hypothetically, to go bankrupt tomorrow, would people be tearing their hair out about the end of teleconferencing? Doubtful.
Of course, unlike the Polycoms of the world, investment banks and insurers like AIG have trillions of dollars in outstanding assets, obligations, and contracts. But that doesn't mean trillions of dollars in losses. Only a portion of their business is tied up with mortgages and derivatives, and while some of those might be worthless, most aren't. We know that because even in a terrible, dysfunctional market, they have been purchased.
The conventional wisdom is that Wall Street is the center of the global financial system, the axis around which all revolves, and if it breaks, if the current government bailout fails to stem the bleeding, the entire world is imperiled. Short-term, there's some truth in that: the world needs liquidity (cash) just as the body needs water. But the world needs a lot of things: electricity and transportation, for instance. In 2002, the global airline industry imploded in the wake of 9/11. Globally, 150,000 people lost their jobs—more than the dire projections of job losses this year on Wall Street. The U.S. government provided $15 billion in bailout funds to airlines in November 2002 alone. In 2008, faced with sharply higher fuel costs, the U.S. airline industry has already shed 22,000 jobs, and has notched tens of billions in losses. Yet the collapse of the airline industry in both 2002 and 2008 did not lead to claims that global travel was imperiled or that the system as we know it was teetering on the brink. |
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