Main Street Should Care About Wall Street

The inability to obtain financing is affecting all kinds of consumers and businesses -- it is cutting deep into the muscle and bone of our economy. Auto leasing companies can no longer make leases viable, so the typical consumer who cannot afford to pay all cash for a car has to resort to loans; again, if banks are reticent to lend against real estate, what makes them likely to make attractive auto loans?

Similarly, if a credit card issuer cannot securitize its receivables because asset-backed markets are freezing up and decides to either shut down accounts to dramatically raise interest rates, what will happen to Joe Consumer who relies on this last resort financing to pay the bills? What happens to students who cannot afford college educations without loans? What happens to the small business owner (or for that matter the big business owner) who can no longer get business loans or credit facilities renewed that are required for basic working capital needs?

Vendor financing is drying up as suppliers themselves are unable to get credit. Accounts payable terms inevitable shorten, while accounts receivable become questionable. Countless businesses across all sectors, including manufacturers of widgets to retailers, are already feeling this pinch and are forced to fund working capital needs out of cash or, if they lack cash, by fire-selling assets like inventory and property, plant and equipment -- again cutting into the muscle and bone of the business.

Besides borrowing, where else can an individual or corporation get money for all of these needs? Savings, of course! Wait, let's look at what happened to those savings. Even for those lucky enough to not have been hit by collapsing real estate prices, most people in working America have 401(k) plans and IRAs and pensions and life insurance policies. Based on the asset allocation recommendations of most financial planners, stocks have been marketed as a great long-term investment (long-term as in 30 or 40 years), thereby commanding as high as 50% to 70% of investors' retirement vehicles.

While some might argue that it's ok that global equity prices have plummeted 40% to50% (60% to70% in some cases) this year because they are long-term investments, what happens if people need access to these vehicles because they cannot get credit? Worse, what happens when the very custodians of these assets, whether they are the Morgan Stanley's or the AIG's of the world, are on the brink themselves?

OK, so what if Main Street can't borrow or has no savings to tap -- at least people still have their jobs. Or do they? When businesses can't roll credit lines they can't meet working capital needs. When working capital has to be reduced, revenues are sure to fall -- and that's even before talking about weakening demand for its goods/services in a Depression economy. When revenues fall, fixed costs have to be reduced. Unfortunately for our hapless Main Streeter, one of the easiest costs to shed is personnel costs. While raising taxes on corporations and cutting taxes on the middle class sounds very enticing to Main Street, the law of unintended consequences may once again strike here. This very path was followed by Herbert Hoover in 1932 following the 1929 market crash; the end result was the Great Depression, and unemployment far exceeded 20%. Main Street America won't benefit from tax cuts when there is no income to tax.

Our government leaders must understand the symbiosis between Main Street and Wall Street. Without the lubricant of credit availability that comes from Wall Street, Main Street will suffer irreparable damage, turning any hope of a "U-shaped recovery" (no one is banking on a "V") into a Great Depression style "L-shaped recovery." The "bad guys" on Wall Street have arguably already gone over the precipice. Like Inspector Javert in Les Miserables, the moral hazard hawks' endless zeal to punish the so-called perpetrators is about to lead the rest of America over the precipice as well.