Main Street vs Wall Street

There's been a lot of talk lately by both the media and politicians regarding how the proposed bailout only helps wall street and not main street. There is a lot of worthwhile debate to be had on the bailout, but this just isn't one of them!

Let me try to paint a picture. I own my home and have positioned myself to be able to withstand the current crisis. But how much do I really own my home? After all, about 60 to 70% of it is still mortgaged, so doesn't the bank own more of my home than I do? Well... no. You see they are just investing the money given to them by their depositors, that is, ordinary folks with checking and savings accounts at their bank. So then all of the bank holders in the country (or at least those having an account at my bank) own a piece of my home (kind of).

Now banks typically sell their mortgages on the secondary markets to Fannie/Freddie who when bundle them into mutual fund -like packages and sell on wall street. Shares of these bundles are then purchased by various money funds including money markets, mutual funds, 401k funds, pension funds, etc.

The wheels that turn America operate on credit. I know credit gets a bad name such as running up credit card debt beyond what you can pay, but credit is also used constructively to fuel the economy.

For example, let's say I have a small business and just got a new order or contract to perform some work. I'll get paid at the end of the contract or some period after the end of each month, but I must hire people to do the work today. These employees want their check on Friday and do not want to hear about how invoices are paid two months in arrears. Where do businesses find the money to cover this short-term cash flow issue, through bank loans. The same principle applies to small and large businesses alike.

So what happens when the markets are scared shitless and won't lend money? Business can't hire even though they have guaranteed work and income. Prosperous businesses can't expand to meet increasing demand. As a result, unemployment increases and average Americans can't find a job. This starts a vicious cycle because this further leads to a lower demand for products and services because (1) people aren't buying because more and more of them are unemployed and (2) businesses aren't buying because they can't get the funds for the initial investment. Of course this leads to further slowdown and even higher unemployment.

Is the Paulson plan the right plan? I don't know. I've certainly have been hearing other alternatives that sound reasonable to me, but I'm not an economist. All I have to say is just don't tell me that this is just a Wall Street problem as our country goes over the precipice toward a 1930s style depression.