Center of Concern | Thu, Oct 16, 2008
In last night’s Presidential debate, the economy was front and center with Senator Obama and Senator McCain offering competing visions. Senator Obama made repeated references “to com[ing] together and to renew[ing] a spirit of sacrifice and service and responsibility,” and the need “to pay for the core investments that make this economy strong.” At the heart of Senator McCain’s economic vision is that each individual should do with their money as they see fit – let Joe the plumber spread his own wealth around, give people $5,000 tax credit to buy health insurance, give people choices in the marketplace.
These competing visions, attempting to address the concerns and aspirations of middle class Americans in the midst of the dual housing and financial crises driven by Wall Street, got me thinking back to the root causes of the crises. What’s the connection between Wall Street and Main Street? More importantly, what is happening to people living in poverty or who are outside the Andy Griffith Main Street/Wall Street paradigm?
I’ve followed the technical discussions on bundled mortgage securities and over-leveraged firms, and no doubt many people made reckless decisions, but I think the problem lies even deeper with the economic philosophy that has reigned for nearly the last 30 years. It seems to me that over time, the rules of the game, attitudes, and behaviors changed on Wall Street and on Main Street -and not for the good. Here’s what I mean:
At its core, the stock market was once a venue for private firms to get much needed capital. By releasing shares, investors bought into the company for the long-haul – sharing in profits through dividends and seeing the value of their investment increase over time. In some ways, it was similar to buying a home. With a traditional 30-year mortgage, you’re making a long-term commitment to the community. As a home-owner and tax payer, you’re invested in having good schools, clean streets, safe neighborhoods, decent jobs. You’re thinking in the long-term and you’re thinking about community, about being part of a collective effort that you want to succeed for yourself and for others.
But things changed on Wall Street and on Main Street.
On Wall Street, some people found that you could make more money by short term investment. With advances in technology, it was now possible on a second-by-second basis to buy low and sell high – or rather, just sell at a slightly higher price and pocket the difference. While these quick transactions introduce liquidity into the system, they also increase volatility and can distort the ability of share prices to reflect the real value of a company. The practice is called speculation and it quickly became an occupation, a way to make money with your money. In short order large sums of money flowed into and out of individual companies on the stock market every day. Hedge funds and institutional investors like pension funds and mutual funds got in on the action. These large influxes of speculative capital by a relatively few players were often enough to influence supply and demand – pushing share values far above or below their real worth.
As regulations prohibiting the practice were removed or ignored, speculation spread from the stock market to the commodity markets that govern the flow of raw materials like oil, wheat, corn, gold which are often bought in bulk and then used to produce other goods. At one time, commodity markets were used to determine the immediate or future price of on real shipments of these items. Farmers could determine the value of their harvest and get a sense for future demand. Likewise, manufacturers could make immediate purchase of raw materials or lock in a price for future delivery. In contrast, speculators buy low and sell with no intention of ever taking physical possession of a barrel of oil or a train car of wheat. Demand is artificially increased and prices soar. While profitable for the speculators, producers who actually need oil and wheat and corn and the sellers of these goods can’t determine a true price or adequately plan for future production needs. Consumers face higher prices for manufactured goods like gasoline and food.
On Main Street, the introduction of adjustable rate mortgages, loosening of down payment requirements, initial periods of interest only payments, and predatory lending practices allowed more people than ever to enter the housing market. Demand shot up. While most of these folks were just looking for the American Dream, a nice home and community to raise their families, the loose lending practices also invited speculators to come to Main Street in droves. There have always been people looking to buy fixer-uppers, put in their sweat equity and then sell the house. But now you had the “flippers” – folks who would buy a property with no money down, make minimal mortgage payments for a few months, maybe a year, add a fresh coat of paint (if that) and then sell the property at its appreciated value as general increased demand continued to push housing prices higher. In a matter of months, flippers could pocket thousands of dollars on one transaction before moving on to the next property and pushing demand upwards again.
Speculation, whether in the financial or housing sectors, involves a lot of smoke and mirrors that eventually create bubbles, where the price of assets rise far higher than can be logically explained. Bubbles can’t last forever and in the end they burst – like what we’re seeing now in the U.S. housing market and in financial services. Bubbles are often driven by a relatively small group of individuals, firms or investor groups looking for a quick return on their buck with no regard to the destabilizing effects their actions will have on the stock, commodity, or housing markets. Or more importantly, the effects their actions will have on the real people, businesses and communities who are in it for the long haul and rely on these markets to function properly.
If the U.S. – and our global neighbors – are to come out of the recession, we need to bring community back into the markets. No man, woman, or nation is an island in the economic sea. How each of us behaves - as consumers, as investors, as business owners, as tax payers, as neighbors – affects not only ourselves, but others as well. This is a good thing. Being human means being social, being in community. It’s time we realize this in our economics and business practices and embrace the strength of community.
To learn more about a vision for the economy that places community and the global common good at the center, please visit www.coc.org/election2008 and check out the section on Livelihoods in a Globalizing World.