Saturday, August 31, 2013

Why Didn't The Fed Bail Out Main Street, Instead?

Answers to this question are not as simple as they seem, in that it also depends on how one defines Main Street. While Main Street conjures up visions of vital centers where innovations happen, companies thrive and a recession in the rear view mirror, there is a different and in some ways more significant Main Street which dominates in the present. The second version is more akin to a sort of backwater - even at times rural interpretation - where wealth is not so much about innovation or cutting edge, as it is about preserving a status quo which has continued to grow in recent decades.

Because this second version of Main Street is presently more significant in terms of aggregate wealth - by far - it is also the one most closely aligned with governments and finance in general. How So? Wall Street holds this coalition of finance at the ultimate level. The same wealth that less prosperous towns and rural areas hold primarily in their home ownership, is defined by the same parcels and instruments that were adapted at the highest levels of finance. Europe adopted similar structures for its wealth holdings as well, which allowed it to integrated with our own.

In other words, the innovative Main Street that is primarily associated with thriving cities, wasn't actually the part of the economy in dire need of assistance. Given the degree of aggregate wealth that real estate holdings actually represent, the actions that the Fed took to bail out the banks and Wall Street start to make a bit more sense. In the run up to the financial crisis, it almost seemed as though a passive element of the economy could be turned into an active element, as technology hit speed bumps coming into the 21st century.

And banks, of course, were at the very center of this (essentially) passive form of economic activity. Some years ago, just before people from all walks of life starting talking about potential "helicopter drops" from the Fed for Main Street, I finally understood the "mystery" of new, nicely built banks, sprouting up like weeds in the most unexpected of places (cities, towns and countryside) at the very moment it was becoming clear that other businesses were not faring so well. In some instances, new banks in tourist areas even pulled out some of the same stops as local business Chambers of Commerce, by presenting a thriving business or tourist oriented front when other local retail locations were struggling to maintain what tourists were actually looking for.

Looking back, the fact that banks in the U.S. were expanding when housing growth was being called into question, only underlines their confidence that they would be taken care of in the event of any significant financial problems. After all, to undercut banks and leave them without help from government, was to undercut what government and citizens had upheld for so long - real estate as primary wealth. No wonder bankers could do basically what they wanted and get away with it! In a recent FT article, Tim Harford likens the bankers to toddlers which have gotten out of control. While it's tempting to think of "cutting them off at the knees" the problem is one of a fragile network of wealth definitions which institutions of all kinds continue to rely upon.

Just the same, this rowdy bunch - who are doing quite well, thank you - remains on everyone's minds: even if too few of those complaining about the bankers are able to offer solutions that make sense to other "camps". In an article for the Project Syndicate, Brad DeLong also questions who is going to be the focus of the central bankers - the macroeconomic camp, or the banker's camp. For the banker's camp has little to no interest now, in the growth that would really pull the economy away from the recent recession. Because of the banker's quest to make sure inflation doesn't grow, those who would remain economically engaged and open new businesses, are the ones that pay the price.

The real challenge for both camps is to pull away from the passive interpretations of what wealth has come to represent. What's more, a focus on fiscal assistance from government suffers the same problems in that it can not establish regenerative growth on its own. Brad DeLong believes that thinking in nominal terms is what causes the banker's camp to hold back, but he has misstated the problem.

Bankers don't have adequate reason to delineate wealth in nominal terms. If this is a "fixed pie" of wealth that they appear to be holding back, it is so in terms of the portion and definition of wealth they believe they have the right to represent. Nominal targeting would allow the public to discern the outsized portion of the economy which bankers desire to dominate. That in turn would allow the public to set about returning that ratio to more active and true growth based elements. A continued focus on government to "save the day" with fiscal policy only serves to keep the balance of power in the banker's hands.

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