Sunday, March 30, 2008

Wall Street versus Main Street? Why not stop at the intersection of Wall Street and Main Street?

In this post I will write mainly in response to a speech Obama gave on the economy.

Barack Obama talks about Wall Street versus Main Street. It seems often that Wall Street and Main Street are viewed as diametrically opposed. That Wall Street prospers on the back of Americans. But does it have to be this way? I think not. Americans, no matter what they make, as long as they make something, should be investing money in the markets. Then they too can prosper when Wall Street prospers. But this requires sacrifice on the part of individuals. They have to choose to save money instead of spend it on items beyond their means. Indeed, this requires that they spend below their means, below their incomes, rather than spend more than their income. If you are in credit card debt money you earn in the market will be wiped out by your credit card interest. Of course there can be good debt, like your mortgage, or your student loans, although as has been brought to light lately that depends on your circumstances. Main Street should prosper on the backs of Wall Street.

"To renew our economy and to ensure that we are not doomed to repeat a cycle of bubble and bust again and again and again, we need to address not only the immediate crisis in the housing market, we also need to create a 21st-century regulatory framework and we need to pursue a bold opportunity agenda for the American people." Have you not studied history Obama? Have you no idea that the economy goes up and down, but in the long-term up? In the long-run, if you're diversified, you should make money. That doesn't mean each day you check your portfolio you'll have more, that doesn't even mean any given year you'll have more than you did last year. You could lose money in the short-run, you will lose money in the short-run from time to time. But if you're investing in the long-run, and diversifying your investments, you will historically make money. You say that we shouldn't put short-term gain ahead of long-term consequences, which I totally agree with, but your thinking betrays you and puts short-term gain first. If you strive to get rid of the cycle of bubble and burst, then you are encouraging short-term gain. In the long-term, the economy will improve, the markets go back up. If you're investing for the long-term you don't have that much too fear, except for politicians who will try to "fix" the economy. But if I can be guaranteed that I won't get caught in a bursting bubble, why wouldn't I invest for short-term gain, why wouldn't I put all my money in the latest investment fad? To say that the government needs to work to get rid of the bubbles and ensure stable growth is naive and just contributes to the get quick-rich mentality that got us in this financial quagmire in the first place.

I would like to know how Obama proposes to stop bubbles. The stock market by nature will create bubbles. Some area starts going up, whether it be technology stocks or mortgage-backed securities, and other people see this and say to themselves, "I should put my money in there since its doing so well." And they do, which drives up prices even more, causing even more people to do that. But eventually people stop putting money in, and prices start dropping. And then everyone thinks to themselves, "I must get my money out so I'm not stuck holding the deed to this house of cards." And so prices are driven down dramatically. Without dramatically restructuring our economy, there's no real way to stop this. The government can't come in and say the price of a stock or security or a home has gone up too much and so no one else is allowed to buy. And yet that's whats implicit behind Obama's statements. To be fair, I don't think Obama is that radical to attempt that, just too dumb to realize that what he says can't work.

One thing the housing bubble has shown is too many Americans aren't diversified financially. Most people's net worth is found in their homes, very little if any outside of them. Although home is housing, it is also an investment and like any investment one shouldn't put all their eggs in one basket. As I said earlier, Americans need to be invested in the market so that they can partake in the riches of Wall Street. Then if your home value drops, you'll be cushioned by investments in some other area. Why not have Main Street and Wall Street intersect?

What should the government do to prevent something like the subprime mortgage problem happening again in the long-term? I would argue the single greatest thing would be to educate students while they are in school about finances. This is more important than any regulation we can create. Kids shouldn't graduate without having been taught about making a useful budget, the dangers of credit cards, home loans, IRAs, 401(k)s, mutual funds, stocks, planning for retirement, planning for a house, the benefits and costs of home ownership, etc. The subprime lenders certainly share a large part of the blame for this whole mess. But if people had been educated before they graduated they would have known to avoid subprime loans. (and if they got one anyways that's their fault.) No matter how much regulation, there is bound to be failures of large companies from time to time. There is bound to be more Enrons. There is bound to be more bubbles. But if the average American, especially the workers of those companies, knew to invest for the long-term and to stay diversified, they would not feel a huge impact beyond at having to find another job. They would have known home prices wouldn't keep going up forever. They would have known not to get a mortgage they can't afford.