THE SAVING OF MAIN STREET
By Richard L. Kesner, President
The CommonWealth Group
September 2008
It is reported that the majority of Americans were against the “Paulson Bailout” because it would save Wall Street firms and do nothing for middle America. Yesterday because of conflicting reports and an eventual defeat of the bailout legislation, middle America took a big short term hit in their investment portfolios as the S&P lost over 9% of value and the Dow lost almost 7% of value.
If saving the Wall Street firms or at least bringing confidence back to the capital markets does not help middle America I don’t know what will. The net effect today is the market is up about 4% (so far) recouping almost 50% of yesterday’s decline.
Charles Kindleberger, one of the great economic historians wrote in his study of financial crisis, “Manias, Panics and Crashes”, “that for historians each event is unique. History is particular; economics is general.” What this means is that each financial crisis is unique in terms of causes and the types of assets it engulfs, but that the conditions that lead to it are always driven by human irrationality and hubris.
What Congress needs to realize and what Secretary Paulson was trying to convey is that the survival of the world economic system is dependent on an elaborate confidence game. The size of the global financial markets, relative to the size of governments, has become so huge there is no other means of maintaining stability than to establish the psychology of confidence.
Without America’s leadership (both the Executive and Legislative Branches) the psychological effect on the credit markets will be devastating. There are numerous articles about America not being the economic leader of the world, but despite this a collapse of the American Economy into a severe recession or worse will spill over throughout the world. NO ONE WANTS THIS. A recession is inevitable. How severe it will be depends on the strength of the bailout.
One of the major problems facing America is that we have become so frightened of short-term pain that we are willing to risk incalculable long-term suffering to prevent it. Any plan that treats the symptom (the loss of confidence) and not the disease ( the underlying problems that caused the loss of confidence) will not solve the problem.
The Paulson Plan treated the symptom. Most Americans realized that when reading about the Plan. Americans seemed willing to suffer short term pain (finally) in order to cure the problem (long term gains). Hopefully that will be the outcome of the delay, and that a bill will be formulated that will make sense and cure the problem.
In order for any plan to succeed, the Plan needs to be followed up by comprehensive regulatory reform that convinces the public that the financial system will be fairer in the future than it has been in the past and that strong steps will be taken to prevent the oversights that led to the current instability.
BACK TO TOP
HOME l CONTACT US
|
