“Stop the greed and corruption on Wall Street”

 

The American people seem to blame Wall Street for the economic hard times they're encountering now. A friend pasted me a link to a story in the WSJ about how Greenwich, CT is ailing due to the maelstrom of destruction in the financial sector. "Look at the comments," he said. I scrolled down for a good 20 minutes. There were pages upon pages of posts, crying foul and for the heads of hedge funds and investment banks. "They hate us," my friend said.

There is a lot of blame being cast at the purveyors of weapons of mass destruction here and very little at the ones who chose to use them. Never mind that savings went to record lows, that home ownership as a percentage of assets went to record highs, that consumer credit grew out of control for years upon years. Conventional wisdom appears to be that this was the fault of lenders for making this credit available, not the fault of those who chose to use it. I call bullshit. Take some responsibility. Some chose to get all levered up and suck down every gadget and luxury they could fit on their plastic, bought houses they couldn't afford, spent up their own unknown future. It's bad risk assessment all around. The lenders are to blame too, sure, but there's a big fat jar of blame to slather around – it shouldn't all be dumped on the heads of "Wall Street".

What Wall Street did was repackage mortgages and sell them to investors. That created liquidity for mortgage lenders to loan to ordinary folk. When an individual trades on Wall Street, they have to put up half of what they play. When people bought houses they had to put up 10% -- and there were tales of 0-5%. The leverage there is 10* what you get in the market. And guess what? People made dumb choices – they bought houses they knew were too expensive with gigantic leverage. This didn't happen on Wall Street, friends, it happened on Main Street. There wasn't a stock broker anywhere near the room when this went down.

Bad decisions and bad consequences – that's how life works. The yin and yang of the universe seems to be working just fine. The lending system, however, is overleveraged and will be hobbled for years to come.